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FTA issues clarification on adjustment of VAT on bad debts

FTA issues clarification on adjustment of VAT on bad debts

The Federal Tax Authority (FTA) of UAE issued a notification clarifying the various conditions under which suppliers can benefit from the Bad Debt relief scheme. This clarification is targeted to the VAT-registered suppliers that are not paid for their goods or services partially or wholly by their customers within a specified period, but still, have to account for the related VAT. The suppliers, in this case, benefit from the Bad Debt relief scheme.

These benefits are in accordance with the Federal Decree-Law No. 8 of 2017 on Value Added Tax. This law requires the VAT-registered suppliers to account for VAT in the same tax period as the period of issue of tax invoice.  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. The bad debt situation arises when the payment related to the invoice is not paid and hence, VAT becomes a cost for the supplier. In such cases, the Bad Debt relief scheme comes to the rescue of suppliers through which VAT adjustments can be made for the suppliers if only the following four conditions are satisfied:

  • The supplier must have supplied the goods and services and must have charged and accounted for the applicable VAT in its tax returns. They must have paid the VAT amount to the FTA.
  • The supplier must write-off the consideration for the supply in full or in part as a bad debt in his/her accounts. This is essential because the supplier can benefit from the bad debt relief scheme only to the extent of the consideration that is written-off in full or in part as bad debt in the supplier’s accounts.
  • The debt must have been remained unpaid for a period of 6 months from the date of supply. This provision allows the supplier to follow-up with the customer for relevant payment of the outstanding amount.
  • The supplier must have notified the customer about the written-off amount of consideration for the supply. The supplier must notify the customer through email, letter, post, or any other method of communication. In the notification that the supplier sends to the customer, it is essential to mention the invoice number, date of tax invoice, and amount of consideration that the supplier has written-off. The customer may or may not send an acknowledgment letter to the supplier regarding the notification received.

If all these four conditions are satisfied, the supplier becomes eligible to claim bad debt relief. However, the supplier must provide the related proofs to the FTA regarding all the measures taken to make the customer aware of the outstanding amount and the notification sent for the consideration of the written-off amount.

The supplier must claim the bad debt relief in the relevant VAT return form. He/she must fill in the details for adjustments in the ‘Adjustment column’ of Box 1 of the VAT Return form. The amount must only be the VAT amount that is to be recovered. The adjustment amount must be reported for each Emirate, wherever applicable. The effective date of this provision is the same as the date of effect of relevant regulation.

This clarification by FTA gives a respite to suppliers and their customers who were confused regarding the VAT amounts that remain unpaid for more than six months and which have been accounted for in the suppliers’ accounts. If you are still confused or need any help in claiming bad debt relief, NR Doshi & Partners is always at your service to provide support in VAT compliance.

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N R Doshi & Partners

NR Doshi & Partners is a top-notch VAT consultant in UAE that has provided VAT consulting and advisory services to several clients in UAE and other countries. You will benefit from the relevant knowledge and experience of our VAT professionals in dealing with any kind of VAT processes and submissions to become VAT-compliant. Whether you are a small firm or a big business, from the financial services industry or retail, or any other, you will get the right guidance with industry-specific VAT consulting services. Be it VAT registration, deregistration, accounting, return filing, modifications in accounts, or changes in the return filed, we have the expertise to deal with any and every VAT compliance process.

For assured assistance at every step of the path to achieving VAT compliance, get in touch with us at www.nrdoshi.ae!

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