Bad debt: evidence, VAT and accounting

A French bad debt requires proof that recovery action against the debtor failed: an overdue invoice is not enough (BOI-TVA-DED-40-10-20, § 40). Output VAT is recoverable from the date of the liquidation judgment, once the customer has received a duplicate invoice bearing the required wording. The loss is booked in account 654; account 678 is reserved for losses arising from a major and unusual event (PCG, art. 513-5).

An unpaid invoice is not automatically a definitive bad debt. Between a simple payment delay, a doubtful receivable, an impairment provision and a confirmed final loss, the accounting and tax consequences are very different. In 2026, the subject remains sensitive because it determines both the deductibility of the loss, the possible VAT recovery and the strength of your evidence file in the event of a tax audit.

Key point: three stages follow one another and are not treated alike. An overdue receivable stays in account 411 and the VAT is untouched. A doubtful receivable is transferred to account 416 and impaired through account 491 on the VAT-exclusive amount, the VAT still untouched. A definitively irrecoverable receivable leaves the balance sheet through account 654 and the output VAT becomes recoverable, provided a duplicate of the original invoice has been sent to the customer.

A receivable is treated as irrecoverable when the failure to collect it has a definitive or sufficiently established character. This is not the same as:

• an invoice that is simply overdue;
• a file that is in the chase-up process;
• a doubtful receivable that may still be partially recovered.

The qualification depends on the facts: liquidation of the customer, closure for insufficient assets, failed enforcement, or a manifest absence of any realistic prospect of settlement.

The administrative guidance is explicit: "the mere failure to collect a receivable when it falls due is not enough to make it irrecoverable. Proof of irrecoverability results from establishing that the recovery action brought by the creditor against the debtor has failed" (BOI-TVA-DED-40-10-20, § 40). Three stages follow one another, with three distinct treatments.

Sources: French Chart of Accounts (ANC regulation No. 2014-03), articles 1214-41 and 1214-49; BOI-TVA-DED-40-10-20, § 40; BOI-BIC-PROV-40-20 for the VAT-exclusive basis of the impairment.

A neighbouring case does not follow this regime: the debt waiver, where the creditor voluntarily waives recovery. Its deductibility follows its own conditions, covered in our guide to corporate debt waivers and their tax deductibility.

The practical rule is simple: the larger the loss, the more robust the evidence file must be. Useful supporting documents include:

• invoices and payment terms agreed with the customer;
• formal reminders, formal notices and written exchanges;
• legal proceedings or documented recovery attempts;
• court judgments, in particular the liquidation order; proof that enforcement action failed; the indemnity paid by the credit insurer after failed amicable or contentious recovery; or proof that the debtor disappeared without leaving an address (BOI-TVA-DED-40-10-20, § 40); a certificate or statement of irrecoverability issued by the insolvency practitioner or the enforcement officer is a useful addition, although it is not a legal requirement;
• an internal decision note and the accounting justification.

Hayot Expertise tip: without a proper evidence file, a bad debt claim is often little more than an assertion. In a tax audit, the documentation is what makes the difference, not the intention.

Yes, but only under certain conditions. The French Tax Code (CGI) and administrative guidance allow the correction of VAT that was originally remitted on an invoice that ultimately will not be collected.

In practice, you need to verify:

• that the loss has a sufficiently certain character;
• that a duplicate of the original invoice has been sent to the customer bearing, in clearly visible characters, the wording required by the tax authorities (reproduced further down); where many invoices are unpaid for the same customer, a detailed recapitulative statement is accepted instead of individual duplicates;
• that the correction is reported on the right VAT return.

If you manage multiple VAT regimes, connect this topic to our guides on VAT returns, VAT for SMEs and the VAT exemption threshold regime.

The accounting method depends on the stage of the file.

Before the loss becomes definitive#

You may be dealing with a doubtful receivable and, depending on the circumstances, a provision for impairment, which is the correct accounting treatment at that stage.

When the loss becomes definitive#

The receivable can be removed from the books and the corresponding loss recognised, in accordance with the French Chart of Accounts (PCG) and the fiscal documentation requirements.

The key is to distinguish clearly between:

• the reclassification entry at the doubtful stage;
• the impairment provision where applicable;
• the definitive write-off;
• the VAT correction where it is permitted.

For tax purposes, the impairment is deductible only if the loss is clearly specified and made probable by events in progress (CGI, art. 39-1-5°). The guidance requires a receivable-by-receivable justification: "justifications must be provided for each receivable treated as doubtful", and it rejects provisions computed by applying a flat percentage to the customer balance or to turnover (BOI-BIC-PROV-40-20, § 170 for the receivable-by-receivable justification, §§ 180 to 200 for the rejection of flat-rate provisions). The basis is the VAT-exclusive amount, and only receivables arising from the normal course of business qualify: loans to third parties or guarantees unrelated to the business are rejected by the courts.

The entries year by year, with the reversal of the impairment, the split between the net amount and the VAT and a fully worked example, are set out in our dedicated article on booking a bad debt to account 654.

The right process is not to jump straight from reminder to write-off. A receivable should evolve through clear stages. The more disciplined the escalation, the easier it is to defend the accounting and tax treatment later.

A useful sequence is:

• overdue invoice and first chase-up;
• formal notice and final deadline;
• review of the customer's solvency and payment history;
• possible impairment provision if recovery remains uncertain;
• final write-off only once the loss becomes sufficiently certain.

This matters because an invoice can be hard to collect without yet meeting the threshold of irrecoverability. That distinction is central to both the bookkeeping and the VAT correction.

The goal is not to be bureaucratic. It is to avoid the two most common mistakes: writing off too early or waiting so long that the file is no longer cleanly documented.

Bad debt is a cash-flow problem before it becomes an accounting problem. Every unpaid invoice ties up working capital that could have funded payroll, supplier bills, rent or investment. The more the business grows, the more important it is to track outstanding balances by ageing bucket.

A monthly receivables review is often enough to reveal which customers need stronger follow-up, which contracts should require prepayment, and which balances are not worth chasing endlessly.

The receivables process is stronger when the commercial team and accounting team share the same playbook. Sales should know when a customer should be put on hold. Accounting should know when a file becomes provisionable. Management should know when the case is no longer a collection issue but a loss issue.

In practice, this means:

• invoices sent on time and with the correct terms;
• payment delays escalated quickly;
• all reminders archived in one place;
• final decisions validated before closing the period.

This discipline is often what separates a file that is defensible from one that is merely plausible.

• writing off an invoice without sufficient evidence to support the decision;
• recovering VAT too early, before the loss is sufficiently established;
• confusing a doubtful receivable with an irrecoverable one;
• failing to document the collection efforts made.

We recommend formalising a standard internal workflow:

1. formal reminder and notice to the customer;
2. assessment and classification of the risk level;
3. decision on impairment provision;
4. qualification of irrecoverability when conditions are met;
5. VAT treatment and accounting entry.

This discipline avoids case-by-case improvisation and makes your year-end closings much more defensible.

VAT recovery is not automatic just because an invoice remains unpaid. Two things must be shown at the same time: that the receivable has become definitively irrecoverable, or that a precise legal situation opens the correction, and that the correction is reported on the right VAT return with a clear supporting document.

The usual failure is haste. Many businesses correct the VAT before the file is strong enough; others wait too long, which distorts the closing and the reported margin. The safe approach is to document three things separately: the right to be paid, the failure of the recovery action, and the VAT treatment. Only once the three levels are aligned does the file become defensible.

One point is regularly missed: the correction is not a credit note. The supplier must send the customer a duplicate of the original invoice bearing the wording required by the tax authorities, and the customer must repay the VAT it had deducted (BOI-TVA-DED-40-10-20, § 110).

The easiest way to miss a bad debt issue is to leave it until closing. A receivable that has not been followed for months becomes harder to document, harder to explain and harder to classify correctly. The best practice is to review the ageing of balances every month and mark the cases that need legal or accounting attention before the books are closed.

A good closing file should show:

• what was still collectible at the last review;
• what had already been escalated;
• which balances were provisioned;
• which balances were written off;
• which VAT lines were adjusted and why.

That discipline keeps the closing process fast and avoids the usual debate about whether the loss is "likely" or "final". At year-end, that difference matters a lot.

A clean file usually follows the same path: friendly reminder, formal notice, solvency review, possible provision and then write-off only once the loss is sufficiently established. That sequence matters because each step strengthens the file and reduces the risk of a tax challenge later.

• do not confuse overdue with irrecoverable;
• centralise all evidence in one place;
• validate the VAT treatment before posting the loss;
• review large balances monthly rather than at the last minute.

This is often what separates a file that is merely plausible from a file that is truly defensible at year-end.

In larger files, this separation also helps the business decide whether the right next step is a final reminder, a negotiated settlement, a legal escalation or a clean accounting loss. That decision is much easier when the operational and closing files are not mixed together.

We can implement a clear accounting and tax procedure for your doubtful and irrecoverable receivables.

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Sound bad debt management rests on three pillars: legal qualification of the file, documentary evidence and consistent VAT and accounting treatment. Getting all three right is what allows you to defend the loss and avoid a reassessment later.

Do you have significant unpaid receivables to deal with before the year-end close?
We can review the files and secure their accounting and tax treatment.

(Official sources: BOFiP on VAT for bad debts (BOI-TVA-DED-40-10-20), BOFiP on impairments and losses on receivables (BOI-BIC-PROV-40-20), Article 272 of the French Tax Code (applicable until 31 August 2026; the VAT provisions are re-codified, on an unchanged-law basis, in Book II of the Code des impositions sur les biens et services from 1 September 2026, Ordinance No. 2025-1247 of 17 December 2025), ANC French Chart of Accounts)