What are Bad debts?
Bad debts mean debts that cannot be recovered. A bad debt is a monetary amount owed to a creditor that is unlikely to be paid because of various reasons, like the debtor not having the money to pay, company going into liquidation or insolvency, dispute in terms of delivery of goods or rendering services etc.
How bad debts are related to VAT?
At the time of sales, the registered supplier charges VAT to the customer and the amount of VAT will be shown as output vat in its VAT return. This amount is normally paid (after adjusting against the eligible input credit) to the tax authority (FTA) in the respective VAT return period.
Example If the sale value is AED 1,000 the supplier will be charging AED 50/- as VAT. This amount AED 50/- is paid to the authority in the same UAE VAT return period. Even though the customer didn’t pay any amount, the supplier has to file the UAE VAT return and pay the amount to the tax authority within the due date.
If the customer does not pay, the supplier is losing AED 50/- in terms of VAT along with the consideration of AED 1,000. The question is whether this amount AED 50/- can be recovered from the Federal Tax Authority or not?
What are the conditions for the Supplier for claiming Bad Debt Adjustment and conditions for the recipient under bad debt adjustment scheme under UAE VAT?
Following are the adjustments in case of supplier and recipient for claiming bad debt adjustment under UAE VAT
In case of supplier
In case of recipient
The registered supplier can reduce the Output Tax in a current tax period to adjust the Output Tax paid for any previous tax period, if all the following conditions are met:
The recipient of Goods or Services should reduce the Input Tax for the current Tax Period being claimed during any previous Tax Period where the Consideration has not been paid and all of the following conditions are met:
Goods and Services have been supplied and the due Tax has been charged and paid
The recipient received the Goods and Services and the relevant Input Tax was recovered in the previous VAT returns.
Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier
The registered supplier has reduced the Output Tax and the recipient has received a notification from the supplier about the amount of Consideration being written off.
More than six (6) months have passed from the date of the supply
The Consideration was not paid for the supply for over (6) six months.
The supplier has notified the recipient of goods and services of the amount of Consideration for the supply that has been written off.
The recipient has to reduce the Input tax in his VAT return, for the period in which he has received the notification about the consideration being written off by the supplier.
What are the records required to be maintained for claiming bad debt relief under UAE VAT?
Though the VAT Law and Regulations does not provide any specific list of records to be maintained for claiming bad debt relief, the record keeping requirements makes it clear that the following records must be kept.
Records of all supplies of goods and services
All tax invoices and alternative documents related to the supplies made and supplies received.
Records of goods and services purchased, for which the input tax was not deducted
Records of amendments and corrections made on accounts and amended tax invoices
Records that shows tax due / recoverable tax after correction of errors or adjustments
How to report the refund of Bad Debts under VAT Return?
Example: Spectrum LLC sold AED 1,000 worth of goods to MNR LLC on 1/1/2018. Spectrum LLC raised an invoice for AED 1,000 plus VAT. MNR LLC failed to settle the invoice promptly.
What is the Tax impact if the receiving company MNR LLC refuses to pay the amount of AED 1,000/-?
Treatment by the supplier Spectrum LLC:
On expiry of 6 months from the date of supply i.e., 30thJune 2018, Spectrum LLC has to write off AED 1,000/- from its books of accounts as bad debts and remaining 50/- (VAT on bad debts) to reverse the output tax.
Spectrum LLC has to intimate MNR LLC that it has written off the receivable from the later.
In the UAE VAT return, Spectrum LLC can reduce in the adjustmentcolumn under the section 1a – 1g (This column is used for reducing the output tax as a result of adjustment of bad debts. The amount entered should be only the VAT amount and should not be the sales value. This will be always a negative figure).
This amount has to be deducted from the total of output VAT for the particular VAT return period.
Further, this adjustment amount of VAT on bad debts should be disclosed emirates wise.
Treatment by the customer MNR LLC:
On receipt of intimation from the supplier Spectrum LLC, MNR LLC has to reverse the input tax credit already availed.
MNR LLC can reduce AED 50/- from the input tax credit shown under line no. 9 – standard rated expenses by disclosing under the column adjustment.