Bad Debts Adjustment in UAE VAT
In UAE VAT, 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 pay’s or intends to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply. However, the supplier is required to pay the VAT even if he has not received the consideration from the recipient. This is because, the time of supply for goods is 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:
- 1. The supplier has paid VAT to FTA but has not received the consideration even after 6 months from the date of supply.
- 2. 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 as ‘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 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.
Conditions for the Supplier for claiming Bad Debt Adjsutment
The registered supplier can reduce the Output Tax in a current tax period to adjust the Output Tax paid for any previous tax period, if all the following conditions are met:
- 1. Goods and Services have been supplied and the Due Tax has been charged and paid
- 2. Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier
- 3. More than six (6) months have passed from the date of the supply
- 4. 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.
Conditions for the recipient under bad debt adjustment scheme
The recipient of Goods or Services should reduce the Input Tax for the current Tax Period being claimed during any previous Tax Period where the Consideration has not been paid and all of the following conditions are met:
- 1. The registered supplier has reduced the Output Tax as stated above and the recipient has received a notification from the supplier about the amount of Consideration being written off.
- 2. The recipient received the Goods and Services and the relevant Input Tax was recovered in the previous VAT returns.
- 3. The Consideration was not paid for the supply for over (6) six months.
The conditions are quite similar to that of the supplier. Here, the recipient has to reduce the Input tax in his VAT return, for the period in which he has received the notification about the consideration being written off by the supplier.
Only when all of the above conditions, applicable to the supplier and the recipient are met, the adjustments under bad debts scheme can be made. Also, the amount of reduction by the supplier and recipient shall be equal to the Tax on the Consideration which has been written off. While the aim of this provision is to protect the supplier and to recover the input VAT recovered earlier by the recipient, at times the process of communicating to the recipient becomes difficult in practice. This because, in most cases, debts are written off owing to the non-traceability of the recipient.