The UAE Federal Tax Authority (FTA) has issued Public Clarification VATP024 to clarify an adjustment on account of bad debt relief for VAT purposes.
Where a VAT registered supplier supplies goods or services to its customers but is not paid (wholly or partially) within a specified period, such supplier may be able to adjust the VAT on the bad debts, subject to meeting the conditions prescribed in Article 64(1)1 of the Federal Decree Law No. 8 of 2017 on Value Added Tax ('Decree-Law').
This Public clarification discusses the conditions which must be met in order to benefit from the Bad Debt relief scheme.
In accordance with the date of supply provisions in Article 252 and Article 263 of the Decree-Law, a VAT registered supplier is generally required to account for output tax in the same tax period in which a tax invoice is issued. 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.
If that invoice is not paid and a bad debt situation occurs, the VAT accounted for by the supplier is likely to become a real cost to the business. The Bad Debt relief scheme seeks to provide a relief to the supplier in such instances by permitting an adjustment of the VAT charged but not paid by the customer.
In order to benefit from the Bad Debt relief scheme, the following four conditions must be met:
VAT should have been accounted for and paid on the supply
The first condition requires that the VAT on the supply must have been charged and paid by the supplier. The FTA considers that this condition will be satisfied where the supplier has charged VAT on the tax invoice and has also accounted for VAT to the FTA via its tax returns.
Consideration of the supply should have been written off
The second condition mandates the supplier to have written off the whole or part of the consideration for the supply as a bad debt in its accounts.
It is important to note that the bad debt relief can only be taken to the extent of the consideration written off in the accounts. Therefore, if only a part of consideration is written off, a bad debt relief can be taken only to the extent of such written off consideration.
For example, where a supplier issues an invoice for AED 105, where AED 100 represents the value of supply and AED 5 represents the VAT amount. If the supplier is not able to collect the entire debt and writes off AED 105, a bad debt adjustment of AED 5 can be taken. On the other hand, if the supplier collects 50% of the consideration and consequently writes off AED 52.5, a bad debt adjustment of only AED 2.5 can be taken.
More than six months should have passed from the date of supply
The third condition requires that the debt must have remained unpaid for a period of six months from the date of supply.
This means that a supplier must wait for six months from the date of supply to initiate the process of bad debt adjustment. The FTA considers that during the course of these six months, the supplier should engage with the customer to recover the debt and collect the outstanding amount.
Notification to the customer stating the consideration for the supply which has been written off
The fourth condition states that the supplier should have notified the customer of the amount of consideration that has been written off.
The FTA considers that the notification issued to the customer must, at the minimum, contain the following information in addition to any other information that the supplier may choose to include:
It may be noted that the Decree-Law does not prescribe any specific method through which a notification should be made to the customer. The FTA considers the requirement of notifying a customer will be satisfied where a supplier sends a letter, email, post, or any other similar communication to the customer stating the amount of consideration that has been written off.
Please note that whilst it is not necessary for the supplier to receive an acknowledgement from the customer before taking the bad debt adjustment, a supplier needs to evidence documentation and/or that best measures were taken to notify the customer. Evidence to this effect must be retained.
Mechanism to claim bad debt relief
Where a VAT registered supplier meets all the conditions prescribed in Article 64(1) of the Decree-Law, it is eligible to claim a bad debt relief.
Any adjustment on account of bad debt relief should be made in the "Adjustment column" of Box 1 of the VAT Return.
The adjustment amount should be the VAT amount only and should be reported for each Emirate, where applicable, in accordance with the respective Output Tax amount being adjusted.