News and upcoming deadlines for recovering VAT on bad debts

Although almost two years have passed since the entry into force of the new rules on the reduction of the VAT base on bad debts, it is still worth keeping the topic in focus, as there is still news on the subject, as confirmed in our current newsletter.

The new rules on the tax base reduction for bad debts were introduced into the provisions of the Hungarian VAT Act as of 1 January 2020. The provisions, which set very strict administrative and other requirements, including legal status requirements, have since been subject to some slight amendments, which have eased the conditions for the reimbursement of VAT paid but presumably never recovered. 

However, the strictest condition remains: the taxable amount of supplies of goods and services performed before 1 January 2016 by the submission of a self-assessment VAT declaration cannot be reduced under the VAT Act, and therefore the related VAT is not recoverable.

Therefore, in many cases, taxable persons are unable to recover the VAT legally paid on transactions they have carried out over many years because, although they meet all the conditions, they are unable to deduct the taxable amount by the self-assessment procedure for transactions carried out before 2016 due to the length of the enforcement or liquidation proceedings which have been in progress for several years.

However, this circumstance, which is outside the control of the taxpayer, is a major threat to legal certainty and is not compatible with the principle of the proper exercise of rights. The Court of Justice of the EU has therefore ruled, inter alia in several Hungarian cases, that it is not possible to limit and prevent the recovery of VAT on the grounds of irrecoverability referring to the expiry of the limitation period.

In view of the above, the VAT Act introduced, with effect from 10 June 2021, a special refund procedure for bad debts, under which VAT on bad debts for which the right to tax assessment has already lapsed can be claimed back without self-assessment procedure, by submitting a single application.

However, in addition to the same conditions in the VAT Act should be applied for the debt to be treated as bad (the same documents and the same legal status are required), it is also essential to take into account the following deadlines:

• if the right to assess the tax has  already been lapsed and the debt becomes bad on or after 10 June 2021, one-year time from the date of becoming bad is available for filing the application,
• if the right to assess the tax has already been lapsed and the claim becomes bad between 10 June 2020 and 9 June 2021, the deadline for submitting the application is 7 December 2021.

Under the special refund scheme, the taxable person can apply directly to the tax authority for a refund of the VAT paid, subject to the above deadlines, provided that he can prove that he is entitled to a refund on the basis of the principle of tax neutrality (without a refund he would be subject to an unjustified VAT burden) and he has no other means of obtaining a refund.

It is therefore worthwhile for all taxpayers to carefully check whether they have any bad debts on transactions performed before 1 January 2016, as VAT may be able to recovered under the special refund procedure, even if there was not be a chance for that so far due to the statute of limitations.

14 October, 2021

The expert team of VGD Hungary is at your disposal in case of any questions.

This newsletter provides general information and does not constitute tax advice.