Invoice not paid? Here’s how to claim input tax on your bad debts…
If you’re registered for VAT on the invoice basis, as most vendors are, you have to pay output tax over to SARS according to the invoices you’ve issued, during a specific tax period. And it doesn’t matter if your client hasn’t paid you yet. You have to pay over the VAT to SARS based on your invoice. But what happens if your client doesn’t pay the invoice and the debt becomes bad? Remember, you’ve already paid that VAT to SARS. Is there a reclaim in input tax allowed to you on the bad debt?
Can you claim input tax on a bad debt?
Well, yes! Section 22(1) of the VAT Act says that if you make a taxable supply, submit a return and pay the VAT over, and an amount becomes irrecoverable, you can make an input tax deduction of the VAT on the amount that became irrecoverable.
The Law doesn’t say you should’ve made an attempt to collect the debt. It just says if the debt is irrecoverable. So if it’s company policy to recognise an unpaid invoice as bad within 32 days, then it follows that on day 33 the debt is bad, and you can claim the corresponding input tax amount in the relevant VAT return.
SARS threatens to disallow your input tax claims
The problem is, if you claim input tax for bad debts (in block 17 of the VAT return), SARS is threatening to disallow your deductions, unless you can prove you handed the debt over for collection. Or some other type of legal follow-up has taken place to prove you tried to collect the debt.
This is an illegal action on the part of SARS!
And the reason it’s illegal is because Section 22(1) of the VAT Act doesn’t say, you must be able to prove the debt has been handed over for collection.
The Law just says if an amount becomes irrecoverable, and you’ve already paid over the VAT, you claim the input tax.
Remember this the next time you make an input tax claim for bad debts, and the SARS auditors ask for proof of collection attempts. Refer them to Section 22(1) of the Act.
