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How to adjust VAT on Bad Debts?

How to adjust VAT on Bad Debts under UAE VAT Law?

Introduction

There could be some situations where a VAT-registered supplier, supplies goods or services to its customers. Thereafter the Customer has not paid (wholly or partially) within that period. However, that supplier is obliged to account for output tax in the same tax period in which a tax invoice is issued. In this situation, the VAT accounted for is likely to become a real cost to the business.  As per the Public clarification related to the adjustment of VAT on bad debts, those suppliers may be able to adjust the VAT on such bad debts, subject to meeting the conditions prescribed in Article 64(1) 1 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax (‘Decree-Law’).

What is Bad Debt?

When a supplier supplies goods or services to its customers and the customer rejects to pay the same wholly or partially within a specified period is called bad debt. Subsequently, the customer can reject the payment for any reason. For example, disputes in terms of delivery, discontinuation of business by the customer, etc.

What are the conditions to adjust the VAT on bad debts?

FTA’s Bad Debt Relief scheme is to provide relief to the supplier in such instances. Furthermore, the Bad Debt Relief scheme permits an adjustment of the VAT the customer has not paid. In order to benefit from the Bad Debt relief scheme, the Supplier must meet the following four conditions:

  1. Goods and Services have been supplied and the Due Tax has been charged and paid.
  2. 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;
  3. More than six months should have passed from the date of the supply;
  4. The supplier should have notified the customer of the amount of consideration for the supply that has been written off.

How to adjust VAT on bad debt in the books of accounts by the Supplier

We can discuss the accounting treatment with the help of an example.

A company named ABC Trading, a VAT Registrant supplier sold AED 5000 worth of goods to XYZ Co on 01 January 2021.

Value of supply           AED 5000

VAT amount                AED 250

During this period, the supplier engaged with the customer to recover the debt and collect the outstanding amount. Now more than six months have passed from the date of supply, but the Supplier ABC Trading is not able to collect the entire debt. And now the customer XYZ Co refused to pay the debt for some reason. Now the only choice left for the Supplier ABC Trading is to write off the entire amount as bad debt.

So on the expiry of six months ie on 30 June 2022, the supplier ABC Trading writes off the full amount receivable from their customer XYZ Co.

How to pass journal entries by the supplier, to adjust VAT on bad debts?

The Journal Entry, for Writing off the Bad Debt amount, from Supplier HAAB Trading’s books of account, is:

Debit: Bad Debt Account  (grouped under, “Indirect Expenses”) amounting 5000, the taxable portion

Debit: Output VAT, which is grouped under “Duties and Taxes”. amount 250, the VAT portion

Credit: ABC Co, the Customer, Amount 5250, the total invoice value.

Now the supplier ABC Trading has to intimate the customer XYZ Co, that the debt amount has been written off. Notification to the customer can be a letter, email, post, or any other similar communication. since the Decree-Law does not prescribe any specific method. The notification must contain:

  • Invoice number and Date of the tax invoice which has not been paid by the customer XYZ Co
  • The amount that has been written off by the supplier ABC Trading.

How to disclose the VAT on Bad Debts in UAE Vat Return?

The supplier ABC Trading meets all the conditions prescribed in Article 64 of the Decree-Law No 8 of 2017 on Value Added Tax. Now they are now eligible to claim bad debt relief. At this point, Supplier ABC Trading has to adjust the VAT on Bad Debt in the “Adjustment column” of Box 1 of the VAT Return.

In order to adjust the VAT on Bad Debt in the FTA Portal

Log in to the FTA e-services,

https://eservices.tax.gov.ae/en-us/login?returnurl=%2fen-us%2fuser%2fdashboard

Go to VAT Tab,

Then, select VAT 201

Next, Select New VAT Return,

Now fill the boxes,

Enter the Taxable amount, in Box number 1,

Afterward, Enter the VAT amount in the next column

Finally, enter the amount for adjustment, in the very next column. Enter only the VAT amount on Bad Debt.