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When and how to adjust VAT relating to bad debts in VAT returns

{You can find the previously published blog with the same title explained in detail, here at: https://www.spectrumaccounts.com/adjustment-on-account-of-bad-debt-relief/}

When and how to adjust VAT relating to bad debts in VAT returns

When you supply goods or services, raise an invoice and the customer fails to pay even after 6 months
from supply, then that can be shown as bad debt and adjust the VAT records accordingly.

One should comply with the following to adjust as bad debt:

1). Goods/ Services shall be supplied and the VAT shall be charged and accounted
2). More than six (6) months has passed from the date of the supply
3). Supplier shall notify the customer about written off of the invoice
4). Supplier shall be update the accounts and VAT returns with bad debts

 

How to adjust the VAT on bad debt in the VAT return:

a) VAT on bad debt should be adjusted in the “Adjustment” column of Box 1 of the VAT Return.
b) The adjustment amount should be the VAT amount only in the respective Emirates of the original
output being reported.

Watch the video on bad debts:

 


In detail:

1). Goods and Services have been supplied and the VAT has been charged and accounted for in VAT records

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.

2). More than six (6) months has passed from the date of the supply.

The debt should be remained unpaid for a period of six months from the date of supply. In other words, the supplier cannot 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.

3). 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.

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.

4). Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier.

This means the supplier has to write 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.

 

Reach out to Spectrum Auditing to know more about everything related to VAT. We will guide you as the right partner in the right direction in letting you make the right decision. Spectrum is your partner in letting you grow in your journey. Reach us: Email us at [email protected] or call us @ +971 4 2699329.

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