What are Bad debts?

In normal course of business goods or services are delivered/ rendered on credit terms, Bad debts are those expenses with regard to non-payment in this regard. In other terms, bad debt refers to an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.

Bad debts treatment in VAT context

Article 25 and 26 of the Decree laws detail the date of supply criteria to be followed for payment of VAT. To simplify, VAT is due at the point which shall be earliest of the following –

  • Date of transfer of goods – under supplier supervision, else date of possession by customer
  • Date of issuance of tax invoice
  • Date of receipt of payment, include advances as well

The above criteria for payment of VAT envisages how Bad debts impact VAT computation.VAT is paid irrespective of whether the amount for taxable supply is actually received or not, and hence the question of treatment of VAT paid on Bad debts arises. In order to relieve the registered taxpayers from the burden of tax paid on irrecoverable debts, UAE VAT Law has incorporated provisions for adjustment of Bad debts.

Let us see how VAT paid on taxable supply when turn bad debt is resolved.

Adjustment for bad debts is elaborated under Article 64 of VAT law, remedies and the conditions for eligibility is discussed further hereunder.

  • Can the registered supplier claim refund on the VAT paid on taxable supplies that turn Bad debts later?

The available remedy as per provisions of VAT law is not refund claim but to reduce the Output Tax liability of the current tax period to adjust the Output tax paid previously on taxable supply that turned bad debt.

  • Are there any conditions to be met to avail the Bad debts adjustment scheme?

Yes, the following set of conditions should be mandatorily met by the registered supplier prior to adjustment of Output tax liability in current tax period –

  • Goods and Services have been supplied and the Due Tax has been charged and paid.
  • Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier.
  • More than six (6) months has passed from the date of the supply.
  • The Registrant supplier has notified the Recipient of Goods and the Recipient of Services of the amount of Consideration for the supply that has been written off.
  • Is there any law implication on the recipient of goods/services under bad debts scheme?

Yes, the recipient of goods/services should reduce the input tax claim for the current tax period to the tune of the input tax claimed previously where the consideration not paid.

  • What are the conditions to be met by the recipient of goods/services under bad debts scheme?

All the following conditions have to be met by the recipient of goods/services: –

  • The registered supplier has reduced the Output Tax and the Recipient of Goods/Services has received a notification from the supplier of the consideration being written off.
  • The Recipient of Goods/Services received the Goods and Services and the relevant Input Tax was deducted.
  • The Consideration was not paid in full or in part for the supply for over six (6) months.

It should be noted that the Output tax liability and input tax claim adjusted by the Supplier and Recipient of Goods/Services shall be equal.

Practical Illustration for better understanding of provisions

SRK Associates rendered services to Magnum Enterprises on 1/1/2018 for service cost to the tune of AED.100,000/- agreed to be paid in installments as below,

AED. 50,000/- on 31/1/2018

AED.25,000/- on 15/02/2018

AED.25,000/- on 28/02/2018

Magnum Enterprises paid AED.50,000/- due on 31/01/2018 but the subsequent installments were lapsed. As per Law, SRK Associates have paid Output tax liability of AED. 5,000/-on the basis of time of supply criteria i.e., 01/01/2018.

Now Magnum Enterprises failed to make the payment and after 6 months from the date of supply i.e., 30/06/2018 SRK Associates can avail the bad debts adjustment scheme and avail reduction in output tax liability for the current tax period equivalent to tax amount pertaining to amount written off as bad debts and all other preconditions duly complied, in this case, the Output tax can be adjusted by AED. 2,500/-.

Likewise, Magnum Enterprise shall adjust the Input tax claim by AED.2,500/- during the current tax period provided all conditions complied.

Importance of proper Accounting

If the company has a proper Accounting System that records all transactions, and close the books of accounts time to time, it will help the refund of tax on Bad Debts more easily. That is why good accounting support and tax filing advice are always recommended for your business.

The Role Of CDA In Bad Debts Adjustment

VAT filing has become an outlandish situation for many businesses due to ignorance of the compliance to law and lack of proper guidance. Any wrong interpretation of the law will lead to any bizarre situation with hefty penalties, loss of goodwill and lack of peace of mind. CDA professionals will examine all your transactions and track your bad debts and find proper solutions to solve the issue.

CDA has highly qualified and experienced chartered accountants as tax advisers who have relevant industry-specific experience in VAT compliance with UAE Laws. We are committed to provide the best VAT Advisory Services in the UAE to the clients in compliance with the rules and regulations of the FTA. CDA experts can provide you with sufficient advice on bad debt adjustment and help you file the tax return on time.

CDA also offers a wide range of business services that includeCFO Services, Auditing Services, Accounting & Bookkeeping Services, Accounting Software services, Due Diligence Services, and Tax Filing & VAT Consultancy services in Dubai.

Feel free to contact us if you have any enquiries regarding your firm’s VAT related issues or about your current business.

CDA expert will give you one-hour Free Consultation to clear your doubts properly!