Adjustment On Account Of Bad Debt Relief

In UAE a registered business can recover the VAT paid on the purchase of goods and services used for business purposes if he has received the tax invoice and he pays or intends to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

This is because; the time of supply for goods is the earliest of the date of transfer, date of invoice, or date of receipt of payment.

On the other side, the recipient of the supply will be in a position to recover the input VAT on the basis of tax invoice even without paying the consideration but intends to pay within 6 months from the due date of payment. With this understanding, the following situations may arise:

The supplier has paid VAT to FTA but has not received the consideration even after 6 months from the date of supply.

The recipient of supply has recovered the Input VAT but failed to pay the consideration within 6 months from the due date of supply

In order to safeguard the supplier and to recover the Input VAT from the recipient in the above situations, a scheme called ‘Bad Debts Adjustment’ is incorporated in UAE VAT Law. Under bad debts adjustment scheme, a supplier is allowed to reduce his output liability in his VAT return and correspondingly, the recipient has to reduce his input VAT in his VAT return, for a period in which the above-discussed situations arise. However, for a supplier to claim relief under a bad debts scheme, there are a set of conditions, which the supplier and the recipient have to meet.

Let us discuss the conditions which the supplier and the recipient have to meet under the bad debts adjustment scheme.

How can the supplier Bad Debt Adjustment

The following conditions are to be met for the registered supplier to reduce the Output Tax in a current tax period to adjust the Output Tax paid for any previous tax period:

• Goods and Services have been supplied and the Due Tax has been charged and paid
• Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier
• More than six (6) months have passed from the date of the supply
• The supplier has notified the recipient of goods and services of the amount of consideration for the supply that has been written off.

The above conditions imply, that provided the tax invoice is issued, the amount receivable from the recipient is written off as bad debts if 6 months have expired from the date of the supply, and more importantly, the supplier has informed the recipient about the amount which is written off as bad debts.

If you have any query related to adjustment on account of bad debt relief then feel free to call +971 4 4542366 today for a quality consultation or please send inquiry to info[at]flyingcolour[dot]com.

Please Note: This article was published on 06th April 2021. The information provided in the article is based on the policies and rules applicable at the time of writing it. Talk to one of our consultants for any recent update or change.