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VALUE ADDED TAX ACT
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7. Bad Debts
2023 Laws not yet authenticated through a Commencement Order

Revised Laws of Saint Lucia (2023)

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7.   Bad Debts

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    7.1   In general.—This applies if a registered person makes a supply of taxable goods or services, accounts for the supply in a tax return, and in a subsequent tax period, it is determined that the registered person will not be able to recover all or part of the consideration from the customer. If a registered person claims relief for a bad debt and the customer subsequently pays all or a portion of the amount claimed as a bad debt, the registered person must report as output tax the presumed tax element in the recovered debt.

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    7.2   Claiming bad debt deductions.—Section 32(9) to (13) of the Act provides rules for registered persons to account for bad debts on supplies reported for VAT purposes. Under section 32(9) of the Act, a registered person can deduct, as an input tax deduction, the tax on a prior taxable supply to the extent that the consideration for the supply is treated as a bad debt. The deduction (a bad debt deduction) is treated as an input tax deduction under section 30(1) of the Act in calculating the net tax liability for the tax period.

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    7.3   Circumstances for allowance of bad debt.—Under section 32(13) of the Act, the bad debt deduction is allowed in two cases. The deduction is allowed if the taxable supply that gave rise to the bad debt was made to an unregistered person. The deduction also is allowed if the taxable supply was made to a registered person and the supplier issues a tax credit note to the registered defaulting customer, listing the amount claimed as bad debt deduction. The tax credit note must contain the relevant particulars. The registered, defaulting purchaser must report as output tax the tax reported on the tax credit note. It is only the registered person that makes the supply that can claim an input tax deduction for the bad debt. An exception applies if a going concern is transferred and the transferee writes off an acquired account as a bad debt.

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    7.4   Calculation of input tax deduction – bad debt.—Under section 32(10) of the Act, the input tax deduction for the bad debt is equal to the tax fraction (definition in section 2 of the Act) multiplied by the portion of the taxable supply written off as a bad debt. The tax fraction is the one applicable when the original taxable supply was made. For example, if $2,300 of a customer's account is written off and the tax rate at the time of the supply was 15%, the input tax deduction is 15/115 x 2,300, or $300.

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    7.5   Requirements for claiming input tax deduction – bad debt.—The bad debt deduction arises when the bad debt is written off by the seller on its books. Under section 32(11) of the Act, to be entitled to this deduction for a bad debt, the registered person must satisfy the Comptroller that reasonable efforts have been made to recover the debt due and payable, and at least one year has elapsed. In order to claim an input tax deduction for a bad debt written off, a registered person must retain a copy of the tax invoice for the supply on which the deduction is claimed. The person also must establish a separate bad debt account for each bad debt for which an input tax deduction is claimed. That account must include a record of the name of the customer, and the date and number of the invoice originally issued, the amount written off as a bad debt, the tax period in which the supply was reported, and the tax period in which the input tax deduction is claimed. If a tax credit note is issued, a copy must be retained.

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    7.6   Recovery of bad debt.—If a registered person recovers any portion of a debt that gave rise to a bad debt deduction, under section 32(12) of the Act, the registered person must report the following amount as tax on a taxable supply (output tax) in the tax period in which the debt is wholly or partially recovered. The amount reportable is calculated according to the formula A x B/C, where: A is the allowable input tax deduction for the bad debt, B is the amount of the recovered bad debt, and C is the total bad debt written off. For example, if the original input tax deduction for the bad debt was $1,500, the recovery was $3 000, and the bad debt written off was $10 000, the output tax reportable on the recovered bad debt is 1,500 x 3,000 /10,000, or $450. A drawback of VAT resulting from a recovery of a previously-deducted bad debt is required, even if the supplier is no longer registered for VAT purposes.

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