Adjustment on account of bad debt relief Summary of the FTA clarification:
A public clarification has been issued by Federal Tax Authority (FTA) in relation to VAT adjustment on account of bad debt relief, which provides that Registrant supplier may reduce the Output Tax in a current Tax Period to adjust the Output Tax paid for any previous Tax Period if all of the following conditions are met:
- Goods and Services have been supplied and the VAT has been charged and accounted for.
- 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.
Detailed Discussion:
When a Supplier supplies goods or services to the customer and raises an invoice to the customer and where that invoice has not been paid by the customer, then the invoice raised can be written off and treated as bad debts in the books of Supplier. Therefore, the VAT charged and paid for that written off invoice can be adjusted in the next period if all the following conditions has been met-
Goods and Services have been supplied and the VAT has been charged and accounted for.
Which states that the supplier should physically supply the goods or provide the services to customer and that the VAT charged on tax invoice should be paid by supplier to FTA in that relevant tax period. The FTA considers that this condition will be satisfied only where the supplier has accounted for VAT to the FTA via its tax returns.
The consideration for the supply should have been written off in full or in part as a bad debt in the accounts of the supplier.
This condition mandates the supplier to have written off the whole or part of the consideration for the supply as a bad debt in its accounts.
It is important to note that the bad debt relief can only be taken to the extent of the consideration written off in the accounts. Therefore, if only a part of consideration is written off, a bad debt relief can be taken only to the extent of such written off consideration.
Example: where a supplier issues an invoice for AED 105, where AED 100 represents the value of supply and AED 5 represents the VAT amount. If the supplier is not able to collect the entire debt and writes off AED 105, a bad debt adjustment of AED 5 can be taken. On the other hand, if the supplier collects 50% of the consideration and consequently writes off AED 52.5, a bad debt adjustment of only AED 2.5 can be taken.
More than six (6) months has passed from the date of the supply.
This condition states that the debt should be remained unpaid for a period of six months from the date of supply. In other words, the supplier can not declare the debt as bad and cannot take the adjustment for VAT in the VAT return within 6 months from the date of supply. Here FTA assumes that during that six months period the supplier is getting engaged with the customer and making attempts to collect the outstanding amount.
Notification to the customer stating that the consideration for the supply which has been written off
Minimum information to be notified to customer when the supplier writes off the invoice are as follows:
- Invoice number and date of the tax invoice which has not been paid by the customer
- Amount of consideration that has been written off by the supplier.
There is no specific method through which a notification can be made to the customer. Supplier can send the notification via letter, email, post or any other similar communication to the customer stating that the amount of consideration has been written off.
It is not necessary for the supplier to receive any acknowledgment from the customer before taking bad debt adjustment. However, the supplier needs to evidence the documentation and that the best measures were taken to notify the customer, Evidence to this effect must be retained.
Conclusion
Therefore, after satisfying all the above conditions the supplier may reduce the Output Tax in a current Tax Period to adjust the Output Tax paid for any previous Tax Period giving effect to the bad debt adjustment relief.
Effect in the VAT return
Any 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.
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