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6 March 20232 minute read

European Union Bad debt relief not always available for debt insurers

European Union

Bad debt relief is not available to third party insurers, even if all rights inherent to that debt are transferred to them.

An insurance company was compensating policyholders with respect to unpaid debts. The compensation paid by the insurance company to one policy holder included most of the debt amount plus the corresponding output VAT. The insurance company thought to recover this VAT under the bad debt relief rules, from the relevant authorities, which denied it, arguing that the insurance company could not claim bad debt relief with respect to a transaction that it had not carried out. The CJEU confirmed that position stressing out that the taxable person carrying out the transaction did receive consideration for their supply, therefore that the debt could not be considered as unpaid.

 

Key takeaway

This judgment is of relevance for all businesses involved in trading or insuring debts. Such businesses may want to anticipate VAT consequences prior to entering similar arrangements. It is only the supplier, who has written off the debt in its bad debt account who can claim bad debt relief. When debts are assigned as part of a factoring transaction, or otherwise, if the debt is not recovered, the debt should be reassigned to the supplier so VAT bad debt relief can be claimed.

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