The neutrality of the VAT system may be strengthened by the new law coming into force next year, whereby the seller will no longer have to bear the tax burden instead of a non-paying customer. However, it is worthwhile to proceed cautiously in such cases, as the repayment is not automatic.
After more than twenty years, a company will have the opportunity again from next year to reclaim VAT from the state for an outstanding invoice that it has been unable to collect for five years. The reintroduction of this option, which ceased in 1997, is based on the law passed by the Parliament in July and could be a positive development for many Hungarian companies.
Receivables that are not recovered during legal collection procedure, liquidation or bankruptcy are accepted as bad debt. Therefore, the seller still has to finance the VAT until the debt is collected from the buyer.
A ruling of the European Court of Justice (ECJ) at the end of 2017 (Di Maura case) is the cause of the Parliament’s decision to reintroduce the VAT refund on bad debt. The ECJ has ruled that EU Member States can determine the terms and conditions under which VAT on bad debt is refunded to the seller. Nevertheless, they are not allowed to completely disallow a refund VAT, even if the receivable is obviously uncollectible.
The new law reinforces the neutrality of the VAT system, as the seller will no longer have to bear the final tax burden unfairly for the non-paying customer, and the option will open retroactively for items invoiced in the last five years if it is found to be uncollectible. It is probably only worth recovering the VAT for larger amounts, and only after the legal collection, bankruptcy or liquidation process is completed. Therefore, it is worthwhile to work together with a tax advisor to complete this type of procedure, as it often takes a long time to exercise the new right of reclaim.
Under the law that will come into force next year, if the seller has acted with reasonable care at the time of the original transaction, as required by law, the seller must notify the customer and the National Tax Authority that the receivable is now classified as unrecoverable for VAT purposes. Next, the seller may deduct in its subsequent tax return the amount of the VAT previously paid. At the same time, the buyer is required to pay back the VAT to the state retroactively.
