Tax and accounting treatment of bad debts

Impairment of bad debts.

A receivable may be called into question because of a deteriorated situation of the debtor, in which case it is referred to as a "doubtful receivable". Prudence leads to the recognition of a depreciation of the receivable, as soon as a risk of non-payment appears. The company then has to set aside tax-deductible provisions. On the other hand, a receivable that has become irrecoverable must be written off as a loss on its amount excluding taxes.

Notion of uncollectibility

The following receivables should be considered uncollectible:

  • time-barred claims
  • debts owed by debtors in receivership
  • debts owed by debtors in judicial liquidation

Since the reform of the law on collective proceedings, claims not declared within the two-month period will not be taken into account by the creditors' representative in the inventory of liabilities, but the non-declaration no longer has the effect of extinguishing the claim. It can therefore only be recorded as a loss when the irrecoverable nature of the claim is proven, in particular, by the failure of the legal proceedings initiated against the defaulting debtor, presumably after the judicial liquidation.

The certificate of uncollectibility

The certificate of uncollectibility can be issued by a third party to the company, such as a court-appointed agent for companies in judicial liquidation, a lawyer or a bailiff, a debt collection agency when all possible actions have been reasonably exhausted.

This document is different from an unpaid notice which only informs the creditor that the debt has not been paid.

The certificate of uncollectibility makes it possible to note the failure of the steps taken by the creditor with his debtor and the certainty of the uncollectibility of the disputed debt. It then allows the debt to be written off and the VAT to be charged, in accordance with article 272 of the General Tax Code. In application of the rules prescribed in the previous sections, the certificate of irrecoverability must include the following information:

  • the name of the debtor,
  • its registration number at the RCS,
  • the number of the invoices and credit notes concerned by the irrecoverability,
  • the total amount including VAT, excluding VAT and VAT of the account
  • the cause of uncollectibility,
  • the address and name of the person to whom the invoice correction should be addressed.