A customer can miss a payment without making the invoice a bad debt. At first, the balance is simply overdue: the sale remains recorded, output VAT stays declared and collection continues. The accounting and VAT treatment changes only when the facts support an irrecoverable write-off and the statutory conditions are satisfied.
In my 15+ years in Estonian accounting, the expensive mistake is usually timing. A company either writes a balance off too casually or waits until the debtor disappears and the evidence can no longer be assembled. The EMTA bad-debt guidance turns section 29¹ into a practical test. This guide explains how to use that test without confusing a reminder, an accounting write-off and a VAT adjustment.
Start with an ageing file, not a tax adjustment
Keep each invoice as a separate claim with its issue date, due date, taxable amount, VAT, payments and collection history. A customer-level total is not enough because the 12-month and three-year limits run from each invoice's due date. Partial payment also means the VAT analysis applies only to the unpaid part.
Document reminders, agreed payment plans, formal demands and the commercial decision on further recovery. The law requires real efforts to collect unless the reasonable recovery cost would exceed the expected proceeds. A silent ledger balance and a late internal note are weak evidence of that judgment.
Pass every condition before reducing output VAT
Section 29¹ of the VAT Act is cumulative: missing one condition blocks the reduction. Confirm that a compliant invoice was issued, the sale and VAT were declared in the original period, and the claim has not been assigned. Then test age, collection, accounting write-off, relationship and notice.
For a claim containing more than EUR 30,000 of VAT, a final court judgment replaces the ordinary 12-month to three-year age window. The threshold refers to VAT in the claim, not the gross invoice value. Several invoices should not be casually merged to make the test easier; EMTA treats each invoice as a separate claim unless the legal recovery process has already combined them.
| Gate | Evidence to retain | Common failure |
|---|---|---|
| Invoice and original VAT | Invoice, KMD and ledger entry | Sale was never declared correctly |
| Age | Due date and ageing calculation | Outside the normal 12-month to three-year window |
| Collection and write-off | Reminders, demands, decision and journal entry | No recovery trail |
| Relationship and ownership | Counterparty check and assignment status | Related debtor or sold claim |
| Written notice | Dated notice stating the VAT amount | Notice sent outside the write-off month |
Book and report the adjustment in the same period
Once the gate is passed, remove the irrecoverable claim from the balance sheet and reduce the taxable amount and output VAT in the KMD for that write-off period. If the invoice belongs in KMD INF, report its unpaid part again with the usual invoice details and negative amounts. The accounting entry, KMD and notice should all point to the same invoice and month.
The EMTA instructions are explicit that no credit note is issued merely because an irrecoverable claim is written off. A credit note changes the commercial transaction; section 29¹ instead adjusts VAT because the valid transaction remains unpaid.
Track the debtor response and any later payment
The written notice matters to both sides. A VAT-registered customer that deducted input VAT must reduce that deduction when it receives notice of the seller's write-off. The notice should identify the invoice, unpaid amount and related VAT clearly enough for the customer to make the correct adjustment.
A write-off does not make later money disappear. If the customer subsequently pays all or part of the claim, restore taxable supply and output VAT for the amount received in that payment period. Keep the closed claim on a recovery watchlist so bank receipts are not posted as unexplained income.
Treat VAT relief as the final output of a receivables process, not as a substitute for one. I want to see one file that connects the original invoice, collection trail, write-off decision, customer notice, KMD entry and any later recovery.
A defensible bad-debt adjustment starts long before KMD filing. Age every invoice, preserve the collection trail, approve the accounting write-off, notify the customer in the same month and keep the tax return tied to that evidence. Related topic: VAT Registration in Estonia.
If Accounting Resources manages your bookkeeping, send disputed and overdue invoices before they reach the write-off stage. For help reviewing an irrecoverable claim and its VAT treatment, use our contact form.