VAT Adjustment Relating to Bad Debt Relief in UAE
In UAE VAT, a registered business can recover the VAT paid on the purchase of goods and services used for business purposes, if he/she has received the tax invoice and he/she 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:
- 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 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:)
How Can Supplier Ensure that the Condition relating to proper Accounting and Payment of VAT is met?
Suppliers can only claim for adjustment of VAT relating to bad debt relief relating to those supplies where they were properly invoiced on time as per the VAT regulation, included in the applicable VAT return and the required VAT payment already made to FTA. When a receivable amount is written off as bad debt, in order to proceed with the reclaiming of the respective VAT amount from FTA, the supplier has to ensure these factors are completed and sufficient records are maintained to evidence the same. This highlights the importance of following proper VAT accounting and timely reporting requirements to ensure any such subsequent reclaim adjustment stands valid.
How Can Supplier Ensure to meet the Condition relating to Communicating the Customer about the Bad Debt Write off?
The regulation does not specify any particular communication method to be followed, however FTA clarifies that if the supplier sends the communication through letter, email, post or any other similar ways that will suffice the requirement to fulfill this condition. It is to be noted that the supplier does not need to receive back any acknowledgement from the customer for the communication relating to write off of the receivable amount. What is important is that the supplier should maintain the records sufficient enough to prove that the diligent efforts to communicate with the customer in this regard is made.
Where Can Supplier make the VAT adjustment relating to Bad Debts?
Once the eligibility to claim for VAT adjustments relating to bad debt relief is established, the supplier can proceed with making respective VAT adjustments in the VAT return of that period. There is an “adjustment column” in VAT return of Box 1, where the amount of VAT for which the claim is made has to be inserted. If the supplies made are relating to multiple emirates, the bad debt amounts have to be reported in the adjustment box of respective emirate. This makes it important to account for even the amounts of bad debts as and when they occur with segregation of emirate wise data, so that reporting in VAT return will be easier.
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