Businesses are facing significant and unprecedented challenges caused by the COVID-19 pandemic and economic backlash. One of the main challenges is that both businesses and clients have not only fallen into debt but have defaulted payments and are currently unable to timeously settle their debts. Bad debts or irrecoverable debts are one of the expenses that have become so popular for many entities in the face of the above stated challenges. In terms of the law bad debts written off can be deducted for income tax if they are due to the taxpayer, have been previously included in the taxpayer’s income of the current year or any of the previous year of assessment and are proven to the satisfaction of the Commissioner to be irrecoverable. In this article we focus primarily on the condition to prove to the Commissioner that the debt is irrecoverable.
As proof as a matter of fact that a debt is bad,the taxpayer is required to prove that he or she has exhausted all recovery measures and the amount is irrecoverable. The current practice is that all recovery measures must have been exhausted for the Commissioner to be satisfied that the debt is bad. The necessary measures should include written summons, legal proceedings, and recovery actions following acquiring a judgement or civil imprisonment. These measures can be very costly considering that court proceedings are both, time and financially consuming. Given the current COVID 19 pandemic and lockdown restrictions that were imposed earlier this year, recovering debts through the courts has also become close to impossible and time consuming. Accordingly, this approach by the Commissioner is becoming too burdensome and inconvenient for most taxpayers. Furthermore, the cost of recovery in some instances may far outweigh the debt that is being sought to be recovered. Joinder of parties may be impossible in some instances as the debtors are more often than not located in different parts of the country and which escalates the cost of recovery. However, no matter how small the debt may be, cumulatively, the debts may become very significant for them to be ignored despite cost of recovery being high.
The ZIMRA guidance through the Income Tax Handbook has not necessarily outlined procedures to be taken in proving the debt was irrecoverable. It only mentions a few bare minimum requirements for deductibility of a bad debt. One of the requirements is that it must be sufficient that the creditor has taken all reasonable steps to collect without success so this will constitute sufficient grounds for a claim. The implication is that it is not essential that the taxpayer should have sued for the debt to become irrecoverable. The is evident in the case of BT (Pvt) Ltd v Zimbabwe Revenue Authority, 2014, deduction of bad debts was allowed because the taxpayer could not legally take RBZ to court on the basis that RBZ assets cannot be attached in pursuant of any court order. In some cases a creditor may not consider suing his debtor if, for example, he had good reason to believe that the debtor was a man of straw. Also, the debtor may not attempt to sue if he considered the costs of suing to be unbearable or to be more than the amount being perused after, making the purpose of the whole procedure logically meaningless.
Ordinarily the mere fact that a debtor is insolvent, has died without leaving sufficient assets, or in the case of a company that is under judicial management or in liquidation with no sufficient assets from which to pay debts, is sufficient evidence that the debt is irrecoverable. But on the other side, the fact that a debtor is continuing to carry on business after declaration of being unable to meet his/her debt does not necessarily mean that he can meet his obligations and in circumstances such as these the creditors’ own knowledge of a debtor’s position may provide useful confirmation of the creditor’s claim. This can also be used by the ZIMRA to make the necessary judgement on whether a bad debt claim is irrecoverable.
In conclusion, taxpayers are advised to carry out the necessary procedures needed if possible before claiming a bad debt expense. If the procedures cannot be carried out for any genuine justifiable reason, the grounds of this must be communicated to the ZIMRA so that it is satisfied that the bad debt claim was indeed unrecoverable.