Businesses can recover the input VAT incurred on the purchase of goods and services that used or intended to be used for business purposes if a tax invoice is received and fully or partially payment is made, or there is an intention to make the payment of consideration for the supply within the next six 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 the earliest of the date of transfer, date of invoice or date of receipt of payment.
As per the article (64) of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, 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, if certain conditions are met.
According to the date of supply provisions in articles (25&26) of the Federal Decree-Law No. 8 of 2017, 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.
In case of the invoice is not paid within the agreed date and a bad debt situation occurs, the VAT accounted for by the supplier is likely to become an actual cost to the business. The Bad Debt relief scheme seeks to provide relief to the supplier in such instances by permitting an adjustment of the VAT charged but not paid by the customer.
WHAT ARE THE CONDITIONS FOR BAD DEBT RELIEF?
Art. 64 of the Decree-law specifies the conditions that must be met in order to make an adjustment for bad debts:
- Goods or services must have been supplied, and the output VAT must have been charged, accounted for and paid to the authority;
- 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 months from the date of supply has passed; and
- The supplier has notified the recipient of the goods or services of the amount as consideration for the supply that has been written off.
WHAT IS THE MECHANISM TO CLAIM BAD DEBT RELIEF?
The VAT registered supplier is eligible to claim a bad debt relief where the above conditions are met. In this case, a tax credit note is required where there should be sufficient description for the adjustment of bad debts.
The 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.
HOW TO DETERMINE THE AMOUNT OF BAD DEBT RELIEF?
In the case of the part payments, the VAT registered supplier has to be careful when determining the amount of the bad debts. It is pretty typical for a taxable person to pay sums on account where they have an account running with a particular supplier. The taxpayer pays an amount now and then, and this is allocated against outstanding invoices, but which invoices?
On bad debt adjustment, there is a general rule that the consideration received is allocated to the older invoices first, unless the purchaser specifies the payment as relating to a particular invoice and in which that invoice is paid in full. This could be important when the supplier issued different rated invoices (5% & 0%, etc..) on the same day. These supplies are aggregated and treated as one, and any payments are apportioned between those two invoices.
Assume that the supplier (X) has issued the following invoices in AED to the customer (Y)
The customer (Y) paid AED 210 on 13-06-2021 and specified that this payment is for the invoice issued on 25-04-2021. Also, the customer (Y) made a further payment for AED 2,800 on 14-08-2021. What will be the bad debt relief claim to be made on the return to 31 December 2021?
As long as the customer specified the first payment to settle the invoice dated 25-04-2021, so it will be excluded from the calculation.
The second payment amounted to AED 2,800, normally allocated to the oldest invoices as per the general rule. AED 800 goes to the first invoice dated 01-04-2021, and AED 2,000 goes to the following two invoices dated 15-05-2021 as both have been issued on the same day, in which an apportionment should be done as follows:
Invoice 1: = 700/2,800= 25% * 2,000= 500
The remaining outstanding of the first invoice is AED 200 (700-500=200)
There is no VAT charged on this invoice to be written-off.
Invoice 2: = 2,100/,2800= 75% * 2,000= 1,500
The remaining outstanding of the second invoice is AED 600 (2,100-1,500=600)
The outstanding VAT is AED 28.57 (600*5/105=28.57)
Thus, the bad debt relief claim on the return to 31 December 2021 will be AED 28.57.
The last invoice still did not pass six months to be written-off.
XB4 is one of the leading, experienced, and professional Tax consultants in the UAE that can help your business in the claim of bad debts in UAE. To know more about your business’s bad debt adjustment and obligations related to VAT in UAE, you may contact us.