Federal Tax Authority of the UAE (‘FTA’) released its new Public Clarification on Adjustment on Account of Bad Debt Relief.
1. Conditions
The clarification confirms that in order for a taxpayer to recover VAT on bad debts the following conditions (Article 64 (1) of the Decree-Law) must be met:
Condition 1. The goods and services should have been supplied and VAT should have been accounted for by the supplier.
According to the clarification this condition would be met if the supplier has charged VAT on the tax invoice and has also accounted for VAT to the FTA via its tax returns.
Condition 2. More than six months should have passed from the date of supply.
This condition means that supplier has to wait 6 months period from the date of supply before initiation the process of bad debt adjustment.
It is also mentioned by the FTA that in course if these 6 months period, the supplier should engage with the customer to recover the debt and collect the outstanding amount.
Condition 3. All, or part, of the consideration must have been written off.
This condition means that supplier have written off the whole or part of the consideration as a bad debt in its accounts. It is worth noticing that that to the extend of the consideration could be taken only bad debt that has been written off. Thus, in case f consideration has been written off partially, a bad debt relief can be taken only to the extend of that written off part of consideration.
Example:
Invoice issued by VAT registered suppler: AED 105
Value of Supply: AED 100
VAT: AED 5
Supplier collected from the customer: AED 52.5
Supplier writes off: AED 52.5
Bad debt adjustment of AED 2.5 can be taken
Condition 4. The supplier must notify the customer in writing of the amount of consideration written off.
There is no specific format for the notification, however, the FTA considers that it should at the minimum contain:
· Tax invoice that has not been paid by the customer credentials (number and date);
· Amount of the consideration that has been written off.
In addition, the supplier may include any other additional information to the notification.
As per the clarification, notification requirement would be satisfied where the supplier sends a letter, email, post, or any other similar communication to the customer stating the amount of consideration that has been written off.
It is also worth noticing, that the supplier is not obliged the supplier to receive the acknowledgment from the customer prior taking the bad debt adjustment.
2. Claim mechanism for bad debt relief
If all the above conditions are met, the supplier has the right to claim for bad debt relief. This should be made in the “Adjustment column” of Box 1 o the VAT return.
The adjustment amount is a VAT amount only and this should be reported for each Emirate separately, where applicable according to the relevant Output Tax amount that has to be adjusted.
