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May 12, 2020

We are only now beginning to get a sense of the financial impact of the COVID-19 pandemic. One of the unavoidable consequences is an increase in irrecoverable debts. In this article we explore the VAT impact of irrecoverable debts from the perspective of the debtor and the creditor.


A harsh reality of the impact of the COVID-19 lockdown is that irrecoverable debts are likely to spike to the extent not seen in recent years. We are also likely to see businesses going into liquidation at an accelerated pace. 

Other than the direct financial impact of not being able to recover outstanding debts and the emotional stress of not being able to pay creditors, there may also be further nasty surprises hidden in the VAT closet.

Let’s see…

The debtor

As a general principle a debtor is entitled to make an adjustment in respect of VAT charged on a supply where the debt is subsequently written off. This seems quite simple; so why are we talking about this?

As for most other things, the devil is in the detail. 

In practice the person making the deduction must be able to prove that the debt has become irrecoverable. The person must furthermore be able to prove which specific invoices are being written off and that the output tax on those invoices was included in a specific VAT return and paid to SARS. 

But it does not end there …

As far as the debt being irrecoverable is concerned, the person making the deduction must write the debt off in its accounting records and may not pursue the recovery of the debt personally. The good news is that the debt may be handed over to a debt collector for collection. This does not compromise the ability to make the VAT adjustment in respect of the irrecoverable debt.

The VAT vendor may not make a general provision for irrecoverable debts for accounting purposes when making a VAT deduction for irrecoverable debts. The specific debt in respect of which a VAT adjustment is made must be provided for.

And now the challenges! 

Many debtor systems allocate payments to the oldest invoices first. This may not be the actual invoice paid. Systems also tend to allocate payment to interest first where a client may have had no intention to pay any interest. And it gets really interesting if a single invoice consists of standard-rated, zero-rated and exempt supplies.

 Unless the process of allocating payments is carefully managed it may become impossible to prove which invoices and which elements of invoices are outstanding and are being written off. The onus of proof rests squarely on the person making the claim. If the debtors system fails you, do not expect any sympathy from SARS!

But there is more! 

In practice there are often unallocated payments. The onus is on the person making the deduction to prove that the unallocated payments do not relate to invoices that are being written off.

So what does all this mean?

In practice before an adjustment for irrecoverable debts is claimed, the VAT vendor must make absolutely certain that its claim is supported by actual invoices and prove that such invoices have not been paid. This may not always be as simple as it seems. 

The creditor 

In the case of a creditor not being able to settle an invoice on which input tax has been claimed within 12 months from the time that the input tax deduction has been made, the creditor must reverse the input tax previously claimed.

But the “reverse-input-tax-web” is wider than just the 12-month rule.

If a vendor is declared insolvent before the 12-month rule is activated, input tax on outstanding invoices must be reversed at the time of being declared insolvent.

It gets worse; if a creditor enters into any compromise with its creditors before the 12-month period ends (whether a compromise per the Companies Act or otherwise), any input tax claimed on invoices which would no longer be payable as a result of the compromise, must be paid pack to SARS.

And should a person decide to simply deregister as a VAT vendor to avoid the above nasty consequences, it does not work either! If the person deregister as a VAT vendor before the expiry of the 12-month period, input tax claimed on all unpaid invoices at the time of deregistration must be reversed and paid back to SARS.

Other issues to consider

No, enough is enough. In a future article we’ll deal with the consequences of the sale or acquisition of a debtor book. 


What seems to be a simple straightforward process in practice often turns out to be a nightmare when large volumes of transactions are involved. The simple solution to this challenge is to ensure proper recordkeeping as a matter of general good corporate governance.

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