Debt recovery is a necessity for any business – small, medium or large – for at least two sets of reasons. Firstly, for the obvious negative impacts that outstanding money has on the regular activities of the business. Secondly because clarity, honesty and truthfulness must be demonstrated for the financial situation of the beneficiary as well as for the profit and loss statement of every company. For these reasons the planning and implementation of the recovery of uncollected receivables is a necessary part of every business activity.
Even if not (completely) satisfactory, the action directed towards the recovery of debts proves to be highly beneficial in relation to the tax benefit that the company derives from the assessment of the bad debt. In particular, credit loss can be deducted for the purposes of direct taxes when it is confirmed by “certain and precise requisites”, e.g. upon the negative conclusion of a compulsory enforcement or when you start an insolvency proceeding (such as bankruptcy, administrative compulsory liquidation, etc.). It is also possible to issue a so named “Variation Note” for insolvency or enforcement proceedings which remained unfruitful, therefore recovering the IVA (Italian VAT) already paid for transactions where the invoice was issued.
This means that the procedure of the judicial recovery of debts is essential in order to:
– ensure that the company’s accounting is correct, truthful and in accordance with the law;
– deduct the loss on bad debts, obtaining fiscal savings in terms of direct taxes;
– recover the IVA (Italian VAT) paid on the transaction that was the source of the credit.
Here is an example. A public limited company that we will call Alfa is owed a credit of € 12,200.00 including IVA (Italian VAT) from someone. The judicial recovery, unfortunately, was not successful for the unrecoverable insolvency of the debtor. The conclusion of the procedure will, however, allow Alfa to get an immediate benefit amounting to EUR 4.950,00 (equal to the sum of the IVA [Italian VAT] recovered of € 2,200.00 and € 2,750.00 of saving on Corporate Tax).
This result is unlikely to be obtained in any other way other than with the implementation of a judicial debt recovery action. For example, it could prove to be very risky, the widespread practice of credit transfer without recourse. This is because the tax authorities may at any time deny the tax benefits achieved with credit transfers that do not possess valid economic reasons but where they are conducted with the sole purpose of fraudulently achieving tax savings, especially when the transfer happens for a significantly lower amount than its original value.