Companies may have difficulty collecting their receivables. These may be contentious or may become irrecoverable for various reasons. These difficulties have accounting and tax implications. Through this article, Recouvéo will help you understand on the accounting entries of these receivables and the tax impact they have on your company.

As a principle, when you bill your client you establish an amount receivable certain in its principle and amount. When an invoice remains unpaid at the end of the fiscal year you must still count it as a taxable product and you will therefore be forced to pay a tax even though you have not received any payment for this invoice.

In order to deal with this problem, the solution is to provision your customer risk: you anticipate the probable charge that would result from a non-payment. In accounting terms, this involves depreciating the corresponding receivable normally recorded as balance sheet assets. If the loss of a receivable is probable but unsure, then under certain conditions you can build a provision and deduct it from your taxable income.

Provision for disputed or doubtful debts
We talk about:

  • “provision for disputed debt” when you face a customer who refuses to pay because he disputes the invoice, either in its principle or in its amount.
  • “Doubtful Debt Provision” if you are dealing with a client who is clearly encountering financial difficulties paying you.

To be tax deductible, the following fund and form conditions must be met:

  • Fund Conditions:
  • receivable recognized in the year in which it became certain,
  • claim arising from the normal activity of the company,
  • risk of probable loss at the end of the financial year (degraded financial situation of the debtor, proven litigation, etc.).
  • Formal requirements: justification of probable character documented
  • for each depreciated claim,
  • and for each accounting year.

The documentation of each file is particularly important and must include:

  • the history of the actions carried out,
  • a copy of postal exchanges, mail, text messages sent / received,
  • A detailed report of oral exchanges or home visits,
  • an analysis of the disputes raised by the client, if any,
  • financial or other documents attesting to the client’s financial difficulties (annual accounts, tax reports, K-Bis extract, status of registrations of privileges and pledges granted by the clerk of the commercial court, etc.),
  • any other documents useful to understand the situation.

This documentation must be updated for each fiscal year.

In case of large sales volume, the use of a receivable management software can facilitate and optimize the collection of unpaid invoices and ensure an updated documentation of files and a dematerialized backup of all records.

Recognition as a loss of debts that have become irrecoverable / Loss recognition of a bad debt:

The mere failure to collect a debt at due date is not enough to give it the status of an uncollectible debt, whatever the reason for the failure to settle (insolvency, commercial dispute). The proof of irrecoverability results, indeed, from the finding of the failure of the lawsuits brought by a creditor against his debtor.

In practice, a claim becomes permanently irrecoverable, particularly in the following cases:

  • deceased client,
  • customer disappears without leaving an address,
  • payment was made with a stolen check,
  • customer who has been victim of a scam,
  • client subject to bankruptcy proceedings (judgment pronouncing the continuation of the activity of the company and stopping the recovery plan if it turns out that the claim remains unpaid),
  • client subject to liquidation proceedings,
  • debtor subject to a conciliation or safeguard procedure
  • prescribed claim,
  • payment of an indemnity by the credit insurer, which establishes the failure of the appropriate recovery actions initiated.

In principle, and apart from the cases presented above, the claim is considered uncollectible only when the creditor has exhausted all the remedies in regard to the debtor. To implement these remedies, the debtor must be identified at a specific address allowing him to receive the mail.

Nevertheless, as a matter of temperament to this very rigorous and binding principle, the jurisprudence seems to consider the amount of the claim due in order to analyze the extent of the means to be implemented. In fact, there must be a certain proportionality between the amount of the claim due and the means to be used in order to establish the exhaustion of domestic remedies, which must therefore be understood as the reasonable means of appeal to be brought.

Thus, the amicable / judicial collection scenarios to be implemented must be proportionate to the amount of the receivables, and in the event of non-collection at the end of these, it seems conceivable to record a loss regardless of the customer’s situation. It is therefore particularly important to draft an internal procedure defining the dunning scenarios applied as well as the terms for the write-off and depreciation of receivables. This methodology, which must be proportionate to the amount of the receivables, may be presented to the tax authorities in the event of a control to justify the write-offs and recognized provisions.

Reclaim of VAT on bad debts:

For sales of goods, and for services when the service provider is authorized to pay VAT according to debits, VAT is due on the date of delivery or invoicing irrespective of the date of payment of the price. (CGI, articles 269, 2-a and c). However, article 272 of the CGI allows the supplier or the service provider to reclaim the tax paid if his claim becomes uncollectible.

It is however necessary to follow a very specific procedure in order to request the refund of the VAT:

  • The refund request must be made in the second year following the year in which the VAT is recoverable.
  • a registered letter with acknowledgment of receipt must be sent to the customer which will necessarily contain a duplicate of the unpaid invoice to which you must add the mention: “Invoice remained unpaid for the sum of ………… euros (net price) and for the sum of ……. euros (corresponding VAT) which cannot be deducted. (CGI, article 272). “

In case of non-compliance with these formal requirements, the administration would be entitled to redress.

If there are several unpaid invoices for the same customer, for the sake of simplification, the company is exempted from sending this duplicate for each unpaid invoice provided that tit issues for each defaulting client a summary of unpaid invoices. A copy of the summary statement must be kept in support of accounting.

In conclusion, the recognition of customer provisions and write-offs for bad debts have tax impacts that must be known, anticipated and controlled.

It is therefore essential to carry out a thorough and documented reflection aimed at defining, on the one hand, amicable / judicial collection scenarios proportionate to the amount of the claims and, on the other hand, accounting and tax impacts (provisions and losses) in the event of failure. of these.

Recouvéo

Expert en credit management et accompagnement financier

www.recouveo.com

Pour toute question ou pour prendre rendez-vous:


+33(1) 84 20 04 30


contact@recouveo.com

Envoyez-nous un message ...