Payment reminder refers to a written or electronic request from the creditor to the debtor to settle an invoice that is due but not yet paid. It is the first stage in out-of-court receivables management and aims to prevent payment defaults without immediately initiating legal action.
Legal basis and tax-relevant aspects
A payment reminder is not a formal dunning notice in the sense of the obligation to determine default under the German Civil Code (BGB); nevertheless, it can expressly state that default will occur if payment is not made. Important legal reference points are the German Civil Code (BGB) regarding default and default interest and the Commercial Code (HGB) regarding retention obligations for accounting records. Of particular tax relevance is whether VAT must be accounted for depending on the chosen taxation method (accrual vs. cash accounting) — i.e., whether it is recognized at invoice issue or only upon receipt of payment.
Practical notes:
- Under the BGB, consequences of default arise if the debtor does not pay after due date and a reminder; the statutory rules on default interest and the flat-rate compensation remain unaffected.
- Companies must document and retain payment reminders, as they form part of the evidence documentation during external audits (observe retention obligations under the Commercial Code (HGB) and the Fiscal Code (AO)).
- The tax treatment of default interest, dunning fees and bad debt losses follows the general tax law provisions and depends on the method of profit determination (cash basis accounting or financial statements).
Practical application in accounting
For ongoing accounting it is important to note: a payment reminder does not immediately change the accounting status of a receivable. Only when additional items are realized (dunning fees, default interest) or when receivables are written off are accounting entries required.
Zeitplan und Vorgehen
- First reminder: polite, shortly after due date (e.g., 7–14 days after the payment term) — objective: quick clarification if the invoice was overlooked.
- Second reminder / dunning notice: after a further period (e.g., 14 days) with reference to consequences of default.
- Final reminder / warning: before initiating collection or legal steps (e.g., with a 7–10 day deadline).
Buchung und Dokumentation
- No accounting entry for a mere reminder; the receivable remains in the accounts receivable ledger.
- Dunning fees and default interest: post as other operating income only when invoiced or when the claim is realized.
- On receipt of payment after a reminder: record Bank against Accounts Receivable; for partial payments, book proportionally.
- Bad debts: assess for uncollectibility; if necessary, establish a specific allowance or write off as bad debt losses (tax-deductible with appropriate proof).
Sample wording and examples
Concise and legally sound wording increases the effectiveness of the payment reminder. Examples of short text modules:
- Friendly reminder: "Our invoice No. 1234 dated 01.10.20XX for EUR 1,200.00 was due on 15.10.20XX. Please transfer the amount within 7 days."
- Reminder with notice of default: "Although the invoice is due, we have not yet received payment. Please settle the outstanding amount by XX.XX.XXXX. If payment is not made, we will be forced to charge default interest and dunning fees."
- Final demand: "This is the final reminder before further steps are taken. Please transfer the amount within 7 days or contact us to arrange an installment plan."
Concrete example for accounting practice: You send a payment reminder 10 days after the due date. If there is no response, you include possible dunning charges in the second reminder and calculate default interest from the date default begins. These items are posted only when you actually invoice them to the customer or when payments are received.
Consequences of non-compliance and next steps
If payment reminders remain ineffective, the usual sequence is dunning, possibly debt collection and a court order for payment. For small businesses and freelancers, a staged, documented approach is economically sensible to limit costs and control tax effects.
- Dunning procedure: written reminder → application for a payment order → enforceable title.
- Debt collection: involving collection agencies can be useful in the short term but is costly.
- Tax consequences: bad debt losses can be recognized for tax purposes with proof; VAT corrections may become necessary if a service remains unpaid and the receivable is uncollectible.
Conclusion: A well-worded, legally informed payment reminder is an important instrument of receivables management. Document reminders carefully, observe deadlines and consider both commercial and tax law requirements to safeguard liquidity and tax compliance.