VATP024 -Bad Debts Adjustment in UAE – March 2021
FTA published a Public Clarification on Bad Debts Adjustment in the UAE on 17th March 2021. This guide discusses the conditions that need to be fulfilled in order to benefit from the Bad Debt relief scheme.
Where a VAT registered supplier supplies goods or services to its customers but is not paid (wholly or partially) within a specified period, such supplier may be able to adjust the VAT on the bad debts, subject to meeting the conditions prescribed in Article 64(1) of the Federal Decree Law No. 8 of 2017 on VAT (Decree-Law)
In accordance with the date of supply provisions of the Decree-Law, a VAT registered supplier is generally required to account for output tax in the same tax period in which a tax invoice is issued. This is on the basis that no other event which triggers the date of supply has taken place prior to the date on which the invoice is issued.
If that invoice is not paid and a bad debt situation occurs, the VAT accounted for by the supplier is likely to become a real cost to the business. The bad debt relief scheme seeks to provide a relief to the supplier in such instances by permitting an adjustment of the VAT charged but not paid by the customer
In order to benefit from the bad debt relief scheme, the following conditions must be met:
VAT should have been accounted for and paid on the supply of the goods and services
This requires that the VAT on the supply must have been charged and paid by the supplier. The FTA considers that this condition will be satisfied where the supplier has charged VAT on the tax invoice and has also accounted for VAT to the FTA via its tax returns.
Consideration for the supply should have been written off
The second condition mandates the supplier to have written off the whole or part of the consideration for the supply as a bad debt in its accounts.
Bad debt relief can only be taken to the extent of the consideration written off in the accounts. Therefore, if only a part of consideration is written off, a bad debt relief can be taken only to the extent of such written off consideration.
More than six months should have passed from the date of supply
This requires that the debt must have remained unpaid for a period of six months from the date of supply. The supplier must wait for six months from the date of supply to initiate the process of bad debt adjustment. The FTA considers that during the course of time, the supplier should engage with the customer to recover the debt and collect the outstanding amount.
Notification to the customer stating the amount of consideration for the supply which has been written off
This states that the supplier should have notified the customer of the amount of consideration that has been written off and must contain the following information:
– Invoice number and date of the tax invoice which has not been paid by the customer;
– Amount of consideration that has been written off by the supplier.
There is no specific method prescribed for sending a notification to the customer. The FTA considers the requirement of notifying a customer will be satisfied where a supplier sends a letter, email or post to the customer stating the amount of consideration that has been written off. It may not be necessary to obtain an acknowledgment from the customer. However, it is prudent to retain the evidence of having sent the notification.
Mechanism to claim bad debt relief
Where a VAT registered supplier meets all the conditions prescribed in Article 64(1) of the Decree-Law, it is eligible to claim a bad debt relief. Any adjustment on account of bad debt relief should be made in the Adjustment column of Box 1 of the VAT Return. The adjustment amount should be the VAT amount only and should be reported for each Emirate.
** For further advice, you may get in touch with our Tax Experts.