Tax refunds due to bad debts - אלון טהורי

In the course of day-to-day business, it is common for the customer to demand a tax invoice, as a condition for making the actual payment.
Usually after 30-90 days the debt is paid, we legally issue a receipt and move on, but what happens when the customer enters bankruptcy proceedings / flees the country or simply refuses to pay?

In such a situation we are in a double problem:

When the invoice is issued, income is recorded to our credit, even though we did not actually receive it, income that is subject to income tax / VAT and national insurance.
We did not receive the actual money from the client, for a service or product we provided.

In this article we will try to present our ways of dealing with this shameful situation.

First we will check whether the situation we found ourselves in meets the definition of “bad debt”.

A bad debt is a customer’s debt created during the business activity, which cannot be collected, or alternatively the probability of its collection is very low.
This situation arose when a tax invoice was issued to the customer, for which VAT was paid and goods/services were provided to the customer, but we did not receive the full consideration for it.

A bad debt will be recognized as such, only after it has been proven beyond any doubt that we have done everything in our power to collect the debt, and a bad debt will also be recognized as such in the following cases:

The client has passed away – and there are no realizable assets in his estate.
A company in liquidation.
The customer left the country – and has no realizable assets in Israel.
In special circumstances when the amount is not high, the regional commissioner may recognize the debt as lost if it is proven that efforts were made to collect the debt but these did not yield results.

What do you do at Tal’s?

In order for both the IRS and the IRS to recognize the debt as a bad debt, we must take several steps:

Send a letter to VAT in which the following details will appear:
1. Details of the transaction for which the debt in question was created.
2. Details of actions and efforts we have made in order to carry out the collection, it is advisable to attach email messages, copies of letters, an attorney’s opinion regarding the feasibility of future collection, details of telephone calls and any document that will strengthen his claim that we have made all possible efforts to carry out a collection correctly.
3. Other facts that are relevant to the case, for example: bankruptcy of the company, or the escape of the debtor abroad, or God forbid a death notice, etc.
4. Attach a copy of tax invoices issued to the client.
5. Detail of VAT reports where it can be seen that he did indeed pay the VAT for those invoices he issued to the customer.
to wait at least 6 months from the day the debt was created, but no more than 3 years, where the periods during which the customer was in bankruptcy proceedings or similar legal discussions, at the end of which it was decided that the above-mentioned person was bankrupt, will not be counted in the 3 years.
issue a credit invoice detailing which invoices it cancels, and declare it in the reporting month in which the debt was recognized as lost

An exception to the matter: when dealing with dealers from the Palestinian Authority, the recognition conditions are more flexible, but similar to “Israeli debt”, there is an obligation to prove that the VAT for accounts, invoices from the Authority was paid as part of the monthly VAT report. 879

What do we get out of all this?

First you get a refund for the VAT paid, including interest and linkage.
The debt is recognized as a recognized expense for the Income Tax and National Insurance in the year in which it was recognized as lost, a fact that can save thousands of NIS in tax payments that year.

“Think before you act “

Customers who don’t pay and disappear are part of today’s business reality, when taking preventive measures, you can reduce as much as possible the likelihood that these were created, below are 10 steps that will significantly reduce the existence of a bad debt:

Acceptance of collateral – bags \ credit card.
Receiving an advance on the account.
Signing a fee agreement / work order / clear email that regulates the relationship, the service provided, payment times and means of payment. Always welcome and good.
Performing work according to the actual payment \ the method of steps.
Signing a personal guarantee in dealings with limited companies.
Performing business intelligence tests – BDI before and during providing service to large clients.
Checking the customer on Google – locating lawsuits / open business intelligence.
Management of an organized collection schedule for any debt that starts to be delayed.
Performing barter / barter with the customer in exchange for the service / goods he received.
“Early detection” – to try to identify suspicious behavior, style and character of the person with whom we do business, to exercise personal intuition towards the client, because each of us has life experience that can save us a lot of money along the way.

In conclusion:
Bad debts are a blow to the Israeli economy in general and to the self-employed in particular, but if we have already found ourselves in such a situation, we should try to reduce damages as much as possible by knowing the options that the law gives us in this situation, and learn lessons for the rest of the way!