As is well known, except in cases where the special VAT cash accounting scheme applies, VAT charged as a result of supplies of goods or services must be paid to the tax authorities, regardless of whether it has been paid by the recipient of said goods or services. This has always caused serious financial problems for taxable persons, especially in times of economic crisis, when late payment figures increase enormously.
Spanish VAT law regulates the possibility, provided that a series of strict time requirements are met, for the taxable person to modify the VAT taxable amount when invoices issued to their customers have been unpaid. For this purpose, it will be necessary to distinguish whether the recipient of the transactions subject to VAT is in insolvency proceedings or not.
In short, the procedure means that once a certain period has elapsed since (a) the accrual of the output VAT without having obtained total or partial collection of the credit, or (b) the publication of the order declaring the debtor bankrupt, the taxpayer will have a limited period to modify the taxable amount and VAT charged, and issue the corresponding corrective invoice, which must be sent to the recipient of the transaction.
Once this has been done, the taxable person can declare the rectified invoices in their VAT return and thus recover the VAT paid to the administration and not collected from the customer.
There are not only a series of strict time requirements but also material requirements for the taxable person to be able to exercise this right. Some of these requirements under Spanish law are clearly contrary to the EU’S VAT Directive and case law from the European Court of Justice (CJEU).
For example, it is not possible to modify the taxable amount and recover the VAT on bad debts when the recipient of the transaction is established outside the Spanish territory, or when the credit due is below a certain amount. Sooner or later these requirements, which are not in line with EU law, will have to be reviewed.
Spanish tax authority rules on amending VAT on bad debts
The Spanish tax administration has always been strict in relation to compliance with the deadlines, to the point that the slightest failure to meet one of them is grounds enough to refuse to change the taxable amount and VAT.
However, in some good news, a recent ruling from the Spanish tax authorities stated that in the case of bad debts, when as a result of non-payment it is necessary to terminate the contract after activating a debt recovery procedure in which it has not been possible to collect the debt, it is not necessary to rely on the strict procedure mentioned above.
Instead, the taxable person can argue that what has happened as a consequence of the termination of the contract is that the transaction became ineffective. Article 90 of the EU VAT Directive states that in the case of cancellation, refusal, or total or partial non-payment, the taxable amount shall be reduced accordingly.
Therefore, the taxable person can simply amend the taxable amount and its corresponding VAT by issuing a credit note and declaring this in the corresponding VAT returns.
The above is in line with the CJEU’s statement in Case C-404/16 (Lombard Ingatlang Lizing). The Court pointed out that, where an agreement has been definitively terminated because of non-payment to the supplier, the supplier may rely on Article 90 of the VAT Directive with a view to obtaining a reduction of the taxable amount for VAT.
It is important to highlight that, in order to reach this situation, there must be a cancellation of the contract and, thus, a kind of write-off of the debt by the supplier. This may not be the ideal situation. However, in scenarios where the credit is definitely irrecoverable, being able to at least obtain the refund of the VAT can offer some financial relief for taxable persons facing this uncomfortable situation.
We must not forget that many of the requirements under Spanish law for recovering VAT on bad debts appear to go beyond what is necessary, and are not in line with the VAT Directive and the settled case law of the CJEU. This is a controversial and highly relevant issue, which deserves to be dealt with in a separate article.
Fernando Matesanz
Managing director, Spanish VAT Services
