21 August 2019

It has been one of the most annoying things for Hungarian companies that they had to pay Value Added Tax (VAT) in case of unpaid claims as well, so even if the invoice has never been paid by the business partner. Fortunately, from 2020, the above rules will change, and it will be possible to refund the VAT already paid on uncollectible claims. In our article we summarize the details.

1. The current situation

According to the Hungarian regulations so far, if your company's invoice containing VAT has not been paid and the debt recovery has not delivered results, the claim had to be recorded as a loss together with the VAT paid, meaning that the Tax Authority kept the VAT regardless if the invoice was paid or not.

After the European Court of Justice has ruled in several judgments that VAT on uncollectible claims shall be refunded to the taxpayer, due to the recent domestic changes to tax legislation adopted in July, from 1 January 2020, it will be possible to recover the VAT of uncollectible claims in Hungary as well.

2. When can you recover the VAT from 2020?

First condition: the uncollectible claim

In relation to the new opportunity, the concept of uncollectible claim is found in the VAT Act, according to which a claim is considered irrecoverable if

  1. in the course of enforcement against the debtor, the claim was not, or only partially covered by the debtor’s assets,
  2. the creditor waived the claim under a settlement agreement in the course of a bankruptcy or liquidation procedure,
  3. in case of a liquidation ongoing for at least two years, if the claim is unsecured according to the statement of the liquidator
  4. at the end of the liquidation, the assets taken over under the asset allocation proposal do not cover the claim.

You can see that VAT is only recoverable concerning a claim that the creditor has previously attempted to recover through enforcement or liquidation.

Additional conditions:

Once the claim has passed the above filter, the following conditions must also be met to be eligible for the VAT refund:

  1. In order to request a refund, you must first notify the debtor in writing about your intent and your company must not be subject to bankruptcy, liquidation or compulsory strike-off procedure.
  2. You can only request a VAT refund if it was not foreseeable that the partner would not pay. Grounds for exclusion are if the debtor was subject to bankruptcy, liquidation or compulsory strike-off at the time of the transaction or was indicated in the database of persons with high tax default or tax debt, at the time of the transaction or in the preceding year, or its tax number was deleted.
  3. the invoice shall be overdue for more than one year during which its consideration is in no way reimbursed.

3. How to get the refund

If all the above are met, you can request the account of your uncollectible claim when you file your VAT declaration. The Tax Authority will not refund VAT at the time of settlement, but the actual tax base of the company will be reduced by the amount of the accounted uncollectible claim. Thus, it is a subsequent possibility to compensate your VAT previously paid.

4. Settlement of older claims

It is important that only claims in case of which the performance of the transaction took place after 31 December 2015 are eligible for the above refund, that excludes refund for many otherwise eligible claims.

5. Conclusion

The changes effective from January 2020 will provide a great opportunity for the conscious companies, since in case of proper administration, at least the paid VAT will be recoverably in case of buried claims, which is not a negligible result. If you would like to take advantage of this opportunity, we recommend that you use a legal expert during the debt recovery process.