Treatment of Bad Debts under UAE VAT Law
What is Bad debts?
If the amount due from the customer is not paid in time and customer rejects to pay the same it is called bad debts for the recipient. The rejection of payment by the customer can be for any reason,
for example, the dispute in terms of delivery of goods or rendering services, discontinuation of business by the customer, etc.
How bad debts is 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 1M the supplier will be charging AED 50,000/- as VAT.
This amount AED 50,000/- 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 (FTA) within the due date.
If the customer does not pay, the supplier is losing AED 50,000/- in terms of VAT along with the consideration of AED 1M. The question is whether this amount AED 50,000/- can be recovered from the Federal Tax Authority or not?
Applicability of the VAT Law on bad debts.
Article 64 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax in the UAE has the provisions related to adjustment for Bad Debts. A registered supplier can reduce the output tax on the bad debts if the following conditions are satisfied by the supplier. If all the above conditions are satisfied. The supplier can request the tax authority (FTA) for the refund through the UAE VAT Return by way of an adjustment.
He has to write off the receivable amount as bad debts from the books of accounts.
He should notify the customer that the amount of consideration has been returned off.
Such a receivable amount should be more than six months old from the date of supply.
Responsibility of the customer in the case of bad debts.
The registered customer has to reduce the input tax which he has already claimed in previous VAT return/returns.
How to disclose the VAT on bad debts in the UAE VAT Return.
In the UAE VAT Return form (VAT 201 form) there is a column named adjustments under the section “VAT on sales and other output 1a to 1g”. This column is used for reducing the output tax as a result of the 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.
If the supplier considers your payment as bad debt and if he notifies the same to you that he is going to recover the output tax through his UAE VAT return, you have the responsibility to make the adjustment in your UAE VAT return form as well.
The column shown under the name adjustment in the section “VAT on Expenses and all other Inputs, line no. 9 – standard rated expenses” has to be used for such adjustment. The VAT amount on the bad debts which the customer has not paid but claimed as input earlier has to be deducted from the current period input tax.
In the case of the supplier.
In the case of customer
How to report the refund of Bad Debts under VAT Return.
The disclosure requirement of VAT on bad debts are described with an example given below.
ABC LLC sold AED 1M worth of goods to XYZ LLC on 1/1/2018. XYZ LLC paid 3 postdated Cheques against the sales: AED 400,000/- dated 31.01.2018 AED 300,000/- dated 28.02.2018 AED 300,000/- dated 31.03.2018 AED 400,000/- was cleared on the due date, whereas the other two Cheques were bounced back.
What is the tax impact if company XYZ LLC refuses to pay the balance amount of AED 600,000/-?
Answer:
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Treatment by supplier ABC LLC.
On the expiry of six months from the date of supply i.e., 30th June 2018, ABC LLC is eligible to reverse the VAT amount on the bad debts which were previously paid.
ABC LLC has to write off AED 600,000/- from its books of accounts as bad debts and remaining 30,000/- (VAT on bad debts) to reverse the output tax.
ABC LLC has to intimate XYZ LLC that it has written off the receivable from the later.
In the UAE VAT return ABC LLC can reduce in the adjustment column under the section 1a – 1g.
Treatment by the customer XYZ LLC
On receipt of intimation from the supplier ABC LLC, XYZ LLC has to reverse the input tax credit already availed.
XYZ LLC can reduce AED 30,000/- from the input tax credit shown underline no. 9 – standard rated expenses by disclosing under the column adjustment.
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