Treatment for Bad Debts as per UAE VAT Law

What are bad debts?

Bad debts are those debts which are not recoverable from a customer due to various reasons such as disputes, insolvency etc

How are VAT Law & bad debts connected?

At the time of supply of goods or services, the registered supplier charges VAT to the customer and the amount of VAT will be shown as output vat in their VAT return. This amount is normally paid (after adjusting against the eligible input credit) to the tax authority (FTA) in the respective VAT return period. When the customer does not pay the supplier, then the supplier stands to lose the amount of VAT paid to the FTA. The question is whether the supplier can recover such VAT paid from the Federal Tax Authority?

Article 64 of the Federal Decree Law No.8, 2017, details the conditions under which the VAT paid on bad debts can be recovered by the supplier. They are as follows:

1. Due tax has been charged on the goods/services supplied.
2. Consideration for such supply has been written off in full or part as bad debt in the books of accounts of the supplier.
3. More than 6 months have passed from the date of supply.
4. The supplier has to inform the recipient of such goods/services regarding the amount of consideration for the supply that has been written off.

The supplier has to ensure that all the four aforementioned conditions are satisfied before claiming bad debt relief.

Responsibility of the registered recipient receiving the supply of goods/services is to ensure that the recoverable input tax claimed against such supplies has to be reduced in the current tax period. The conditions to be met by the registered recipient is as follows:

1. The registered supplier has reduced the output tax and the recipient has received a notification from the supplier about the amount of consideration being written off.
2. The recipient received the goods/ services and the relevant input tax was recovered in previous VAT returns.
3. The consideration for the supply was not paid for over 6 months either in full or in part.

Reporting of Bad debts in VAT returns

By Supplier:

On the VAT Return form, there is a column for adjustment under the section “VAT on sales and other output 1a to 1g”. The VAT amount on the bad debt written off has to be recorded under the adjustment column as a negative amount. These should be reported for each Emirate, where applicable, in accordance with the respective Output Tax amounts being adjusted. 

By Customer:

If the customer has been notified that his outstanding has been considered as a Bad Debt by the supplier and is going to recover it through his VAT return, the customer will also have to adjust the amount in his VAT return form as well. Such adjustment has to be made in the adjustment column under section 'VAT on Expenses and all other Inputs (line no. 9) standard rated expenses'. The VAT amount on the bad debts that the customer has not yet paid but initially claimed as input needs to be subtracted from the current period's input tax.

ILLUSTRATION

The disclosure requirement of VAT on bad debts are described with an example given below.

LMN sold AED 1 million worth of goods to PQR on 1/1/2018. PQR paid 3 postdated Cheques against the sales:

• AED 400,000/- dated 31.01.2018
• AED 300,000/- dated 28.02.2018
• AED 300,000/- dated 31.03.2018
• AED 400,000/- was cleared on due date, whereas the other two cheques were bounced.

The recommended tax treament if PQR does not to pay the balance amount of AED 600,000/- to LMN is as follows:

Treatment by the supplier LMN.

On expiry of six months from the date of supply i.e., 30th June 2018, LMN is eligible to reverse the VAT amount on the bad debts which was previously paid, provided

• LMN has to write off AED 600,000/- from its books of accounts as bad debts and remaining 30,000/- (VAT on bad debts) to reverse the output tax
• LMN has to intimate PQR that it has written off the amount receivable against the correponding supply

Upon ensuring the aforementioned actions are taken, LMN can reduce the VAT amount written off against bad debts in the adjustment column under the section 1a – 1g in the VAT return

Treatment by the customer PQR

• On receipt of intimation from the supplier, PQR has to reverse the input tax credit already availed
• PQR can reduce the VAT amount from the input tax credit shown under line no. 9 – standard rated expenses by disclosing the same under the adjustment column.

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