Bad Debts Adjustment under VAT in UAE
Bad debts are the money owed to a creditor that is unlikely to be paid by the debtor and becomes an uncollectible or unrecoverable debt.
In the UAE, a VAT registered business (Seller) can recover the VAT paid on the purchase of goods and services such as raw materials that will be used for the business activities. The supplier (Seller) can reclaim this VAT amount by charging it to the recipient (Buyer) on purchase of the final goods.
If the supplier (Seller) has received the tax invoice for the goods and services and intends to pay this amount, he may have to do so within 6 months after the agreed date of payment for the goods. The supplier (Seller) is required to pay this VAT amount even if he has not received the money from the recipient (Buyer).
The recipient (Buyer) of the final goods may indirectly recover the VAT can he may pay, as the amount mentioned may be all–inclusive of VAT charges in the tax invoice. In such circumstances, if the recipient (Buyer) fails to pay the final amount as per the tax invoice, the supplier (Seller) will be subject to bad debts under VAT, as he has paid VAT to the Federal Tax Authority(FTA) but has not received the final amount from the recipient even after 6 months from the dated invoice of supply.
The UAE VAT Law has introduced the ‘Bad Debts Adjustment’ scheme that deals with issues relating to bad debts under VAT in the UAE.
This scheme allows the supplier (Seller) to reduce his output liability while filing VAT returns and similarly, the recipient (Buyer) has to reduce his input VAT while filing his VAT return.
The supplier (Seller) may claim the relief for the bad debts under the Bad Debts scheme if they can meet the conditions of the scheme.
Conditions for the Supplier (Seller) to be entitled to claim for relief under the Bad Debts Scheme
The supplier (Seller) can reduce the Output Tax if the following conditions are applicable:
VAT initially charged – If the goods and services are supplied and (the Seller) has been charged and paid the VAT on those goods.
Bad Debts are written off – The consideration (final amount) has been written off in full or partly paid as a bad debt in the supplier’s (Seller) accounts.
Overdue Debt – If the consideration amount has not been received for more than 6 months from the date of supply/date of the tax invoice
Notifying the Buyer (Debtor) – The supplier (Seller) has taken the necessary steps to inform and notify the recipient (Buyer) about the amount of consideration due to pay (owed to the Seller) on the purchase of the goods and services.
Conditions for the Recipient (Buyer) under the Bad Debts Scheme
These conditions are applicable when the recipient (Buyer) has not paid the consideration amount, if the conditions are met, the recipient must reduce the Input Tax amount.
Necessary steps taken by the Supplier – If the supplier (Seller) has reduced the Output Tax in accordance with the above conditions and the recipient (Buyer) has received a notification from the supplier (Seller) that the consideration amount is considered as a bad debt and is being written off.
Goods and Services received – If the recipient (Buyer) has received the goods and services from the supplier (Seller)
Input Tax Recovered – If the recipient (Buyer) has recovered the corresponding input tax in the previous VAT returns.
Payment Overdue – If the consideration amount (final amount) for the goods and services was not paid for more than 6 months.
Disclosing VAT on Bad Debts in the UAE VAT Return
Supplier (Seller) – The supplier can disclose VAT on Bad Debts by reducing the Output Tax on the UAE VAT Return form. In the form, there will be a category on ‘adjustment’ under the section of ‘VAT on Sales and other output’ The bad debts can be adjusted under this category. Once the bad debts are adjusted, the Output Tax will vary as per the adjustment. The VAT amount will be entered in negative as this amount will be deducted from the total output VAT for that specific VAT return period. It is beneficial to appoint a tax agent in Dubai that specializes in filing the returns of VAT so that they can disclose the VAT on bad debts and file the returns for other transactions efficiently.
Recipient (Buyer) – The recipient will be subject to adjust their VAT amount also if they have been notified about the bad debt by the supplier (Seller) and the supplier has informed the recipient that the bad debt under VAT will be recovered through his VAT returns. The recipient will adjust their Input Tax on the UAE VAT Return form. The ‘Adjustment’ category can be found under the section “VAT on Expenses and other inputs”. The VAT amount on the bad debts that have not been paid but initially recovered as an input needs to be reduced from the current tax period. It is advisable to appoint a VAT consultant that can offer VAT return filing services to make the process of filing returns easier and quicker.