What Is Bad Debt? Write-Offs, Provisions, and VAT Relief
The three separate steps behind an uncollectible invoice — impairment allowance, write-off, and VAT relief — with the entries, the EU rules and how member states differ.
A bad debt is a receivable you are not going to collect. Handling one properly means three separate decisions, and most of the confusion in this area comes from treating them as a single event:
- Impairment allowance — an accounting estimate that the debt may not be collected. Reversible.
- Write-off — accounting derecognition: the receivable leaves the balance sheet.
- VAT relief — a tax event with its own statutory conditions, evidence requirements and deadlines.
None of them triggers the others. An accounting write-off does not recover your VAT anywhere in the EU, and a VAT adjustment is not what removes the asset from your books. Three gates, three tests.
Step 1: the allowance
Long before you give up, the evidence suggests you might not be paid — the customer is in difficulty, has breached terms, or your own history shows not everything gets collected. Under Lithuanian business accounting standards (VAS 18), an entity must assess at each period end whether the carrying amount of a financial asset exceeds the amount expected to be recovered, and recognize the shortfall in that period's profit or loss.
The receivable stays on the balance sheet; a contra-account reduces its net value:
| Account | Debit | Credit |
|---|---|---|
| 6209 Administrative expenses (impairment) | 1,850 | |
| 2410 Trade receivables — impairment allowance (−) | 1,850 |
The aging report is the standard basis for sizing this: older buckets get a higher expected loss. It is posted through period-end adjusting entries, and it is explicitly reversible — if the position improves, the allowance is reduced.
Note the terminology trap: a "bad debt provision" on receivables is technically an impairment allowance, not a provision in the liabilities sense. It reduces an asset rather than creating an obligation.
Step 2: the write-off
A receivable is derecognized when the entity loses control of it — the rights expire, are transferred, or all recoverable benefits have been received. In practice: the debtor is liquidated, the claim is time-barred, or recovery has definitively failed.
Where an allowance already exists, the write-off consumes it and touches no expense:
| Account | Debit | Credit |
|---|---|---|
| 2410 Trade receivables — impairment allowance (−) | 1,850 | |
| 2410 Trade receivables | 1,850 |
The profit hit happened earlier, when the allowance was raised — which is the point of raising it. If a debt goes bad with no allowance, the expense lands entirely in the period of write-off, which is exactly the lumpiness the allowance exists to prevent.
If the money unexpectedly arrives later, the recovery is recognized as income; you do not reinstate history.
Step 3: VAT relief — the part with conditions
Here is the uncomfortable arithmetic. You invoiced 1,850 € including 21% VAT. You never got paid. But the VAT became due when you issued the invoice, so you already paid roughly 321 € to the state out of your own pocket. Recovering it is a separate process.
Article 90(1) of the VAT Directive is the enabling rule:
"In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States."
Article 90(2) then lets member states derogate specifically for non-payment — which is why this is one of the least harmonized corners of EU VAT. The derogation is not unlimited: the Court of Justice has held it rests on the idea that non-payment may be hard to establish or only temporary, and cannot allow a member state to exclude reduction altogether. A string of judgments has struck down conditions that made relief practically impossible — requiring insolvency proceedings that can run for a decade, requiring the debtor to still be VAT-registered, or requiring the creditor to remain registered.
Two further principles worth knowing: where a national limitation period applies, it runs from the date the debt is recognized as bad, not from the original due date; and the debtor's side mirrors the supplier's. Article 185(2) says no adjustment is required for unpaid transactions, but expressly permits member states to require one — and most do, so the buyer must repay the input VAT they deducted.
How different member states do it
| Germany | Italy | Poland | Lithuania | |
|---|---|---|---|---|
| Trigger | Debt "uneinbringlich" — open-ended test, no fixed period | Debtor becomes subject to an insolvency procedure, or enforcement fails | Fixed 90 days past the payment term | 12 months from the chargeable event, or debtor dead/liquidated/bankrupt |
| Deadline to claim | None specific | Annual VAT return deadline for the trigger year — and missing it cannot be cured | 3 years from end of the invoice year | Current plus 5 preceding calendar years |
| Notify the debtor? | No | No | No | Yes — a document is required |
| Debtor must repay input VAT | Yes, automatically | Yes, except in true insolvency (the Treasury absorbs it) | Yes, automatically at day 90 | Yes, on the supplier's document |
Germany's test is judgement-based: the debt must have become uncollectible, which the tax administration treats as satisfied on insolvency or where recovery is objectively unlikely for the foreseeable future. Contrary to a widely repeated claim, there is no federal six-month or twelve-month rule. Italy's reform means the creditor no longer waits for an insolvency procedure to conclude — subjection to the procedure is enough. Poland runs the strictest clock and the harshest debtor rule: the buyer's clawback is automatic at day 90 whether or not the seller ever claims relief.
Lithuania in detail
The relief lives in PVMĮ Article 89¹ (not in the credit-note rules — a credit note is the wrong instrument here, and the difference matters). Output VAT payable may be reduced by the VAT attributable to debts recognized as bad, where:
- the consideration has been unrecoverable for at least the last 12 calendar months since the chargeable event — or, under the Finance Minister's implementing rules, where the debtor has died, been liquidated or gone bankrupt;
- the output VAT on that debt was calculated and declared;
- the supplier can prove both that the debt is bad and that recovery was attempted.
The evidence burden is tiered by size, aggregated per debtor: the smallest debts need no supporting documents at all, mid-sized ones accept reasonable evidence, and large debts require the full apparatus of a court judgment and a bailiff's act showing recovery failed. Assigned claims, time-barred claims and mutual debts (beyond the net difference) are excluded, as are debts between related parties.
The step that catches people out: the supplier must document the recognition in a free-form accounting document and give a copy to the buyer, by the 10th day of the month following the month of recognition. It must identify both parties, state that output VAT is being adjusted for bad debts, give the debt net of VAT and the VAT attributed, and identify the original invoices. The supplier does not need confirmation that the buyer received it — but without issuing it, the relief is not properly claimed, no matter how thoroughly the debt was written off in the accounts. The buyer, on the strength of that document, must repay the input VAT they deducted.
If the debt is later paid, both sides reverse: the supplier's VAT payable goes back up and the buyer re-deducts.
One implementation detail worth knowing for anyone reconciling a return: on the FR0600 VAT return, the bad-debt adjustment is made only in the output-VAT field (29) — the taxable amount reported in field 11 is not corrected. This is precisely why the relief cannot be run through a credit note, which would reduce both.
What Nordlet does and doesn't do
Honest scope: bad-debt handling is not automated. There is no impairment-allowance workflow, no receivable write-off function, and no bad-debt VAT-relief routine that produces the Lithuanian free-form document or adjusts field 29 for you. The write-off reporting that exists in the product is for inventory, not receivables.
What the product gives you is the evidence and the mechanism:
POST /v1/reports/debt-aging{ side: 'receivables' }— the aging profile that identifies candidates and sizes an allowance.POST /v1/reports/partner-balances— exposure per customer, and the aggregation the Lithuanian evidence tiers are measured on.POST /v1/ledger/journal/transactions/create— the allowance and write-off entries above, posted as ordinary balanced journal entries with a full audit trail.- The VAT return — computed from the ledger, so a manual output-VAT adjustment must be reflected deliberately rather than assumed.
If you need this workflow, treat the aging report as the trigger and the journal as the instrument, and keep the statutory document and its deadline in your own process.
FAQ
What is the difference between a bad debt provision and a write-off?
A provision (properly, an impairment allowance) is an estimate that a receivable may not be collected — it reduces the asset's carrying value and hits profit, and it is reversible. A write-off is derecognition: the receivable leaves the balance sheet because the claim is genuinely gone. The provision usually comes first, so the profit impact lands in the period the doubt arose.
Can I recover the VAT on an unpaid invoice?
Usually yes, but under conditions set nationally. EU law allows the taxable amount to be reduced for non-payment while letting member states derogate, so the trigger, evidence, deadlines and notification duties differ substantially between countries — 90 days in Poland, 12 months in Lithuania, an open-ended "uncollectible" test in Germany.
Should I issue a credit note for an unpaid invoice?
No. A credit note corrects the amount owed; non-payment doesn't change what was owed. In Lithuania specifically, bad-debt relief adjusts only the output-VAT field of the return while a credit note would reduce the taxable amount too — the two are different mechanisms with different legal bases.
Does the customer have to repay the VAT they deducted?
In most member states, yes. EU law lets member states require the debtor to adjust their deduction for unpaid transactions, and Germany, Poland and Lithuania all do. Italy is the notable exception in true insolvency cases, where the clawback is disapplied.
When is a debt "bad" enough to write off?
When recovery is no longer probable — the debtor is insolvent or liquidated, the claim is time-barred, or enforcement has failed. Until then the honest treatment is an allowance, which keeps both the asset and the doubt visible. Note the accounting test and the VAT test are separate, and the tax one is usually stricter.