VAT Adjustment on Bad Debt Relief

There are numerous instances in which a supplier must choose to write off a receivable sum from a customer after VAT payment to the Federal Tax Authority (FTA). 

Suppose the write-off amount, including relevant VAT, hits the supplier’s books as a cost. In that case, the law provides an alternative for the supplier to reclaim the VAT amount relating to such write-offs as a VAT adjustment in the subsequent VAT return. 

The FTA has detailed the conditions and considerations the provider offers in such circumstances. This is a write about VAT adjustments concerning bad debts.

VAT Adjustment for Bad Debts—Supplier Criteria

If the supplier honors all of the following conditions, they may reduce the output tax in the current tax period to compensate for the output tax paid in any preceding tax month:

• The provision of goods and services and the applicable tax levy and payment. Consideration for the supply has been written down in whole or in part as a bad debt in the supplier’s books.
• It is six (6) months past the date of supply.
• The supplier has notified the recipient of goods and services of the amount of consideration written off for the supply.
• The goods and services should have been supplied and VAT on the supply should have been charged and accounted.

VAT Adjustment for Bad Debts—Recipient Criteria

If the recipient did not pay the consideration, neither were the following conditions met; the recipient of goods or services should lower the input tax for the current tax period being claimed for any preceding tax period when they did not pay the consideration.

• As mentioned above, the registered supplier has decreased the output tax, and the supplier has notified the recipient that the amount of consideration is a write-off.
• The recipient received the goods and services and recovered the applicable input tax in prior VAT returns.
•  The consideration is due from the recipient over six (6) months.
• The recipient must reduce the Input tax in his VAT return for the period he got to know that the supplier had written off the consideration.

Conclusion

Adjustments under the bad debts scheme are valid only if all conditions are met, applicable to both the supplier and the recipient. Furthermore, the amount of reduction by the supplier and recipient must be equal to the tax on the consideration written off. 

While this provision aims to protect the supplier and recover the input VAT recovered earlier by the receiver, communicating with the recipient might be challenging in practice. The reason for wiping off dues is that the recipient is not traceable.

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