TAX MATTERS: Recoverability of bad debts

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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 on 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 current 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 judgment 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 Zimbabwe Revenue Authority 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.