BAD DEBTS UNDER VAT
A Bad Debt is a loss that a company incurs when credit that has been extended to customers becomes worthless, either because the debtor is bankrupt, has financial problems or because it cannot be collected.
During a transaction, the registered supplier charges VAT to the customer which is shown as output vat in its vat return. This amount is usually paid to the tax authority during the respective VAT period.
Article 64 of the Federal Decree Law No. (8) of 2017 on Value Added Tax in the UAE, mentions on the matter of adjusting bad debts. A supplier can decrease the output tax on a bad debt if the following conditions are met: –
- 1. The receivable amount is written off as bad debts from the books of accounts.
- 2. The customer needs to be notified that this amount has been written off.
- 3. This receivable amount should be more than six months old from the date of supply.
When the above conditions have been met, the supplier can then request for the refund, through UAE VAT Return by adjustment, from the FTA.
From a registered customer’s side, it is his responsibility to deduct the input tax that he has already claimed in previous VAT Return.
Disclosing VAT on bad debts in the UAE Vat Return
- Supplier: On the UAE VAT Return form, there is a column labelled adjustment under the section “VAT on sales and other output 1a to 1g”. Once the bad debt has been adjusted, the output tax is treated in this column. The VAT amount need to be entered here which is always a negative figure. It is to be deducted from the total output VAT for the specific VAT Return period.
- Customer: If the customer has been notified that his payment has been considered as Bad Debt by the supplier and is going to recover it through his VAT return, the customer will also have to adjust the amount in their VAT return form as well. The adjustment column under section “VAT on Expenses and all other Inputs, line no. 9 – standard rated expenses” is used for this. The VAT amount on the bad debts that the customer has not yet paid but initially claimed as input needs to be subtracted from the current period input tax.
Reporting the Refund of Bad Debts under VAT Return
The disclosure requirement can be explained by the following example:
DEF LLC sold AED 2M worth of goods to JKL LLC on 1/1/2018. JKL LLC paid 3 postdated Cheques against the sales:
- AED 800,000/- dated 31.01.2018
- AED 600,000/- dated 28.02.2018
- AED 600,000/- dated 31.03.2018
AED 800,000/- was cleared on due date, whereas the other two Cheques were bounced back.
If JKL LLC refuses to pay AED 1,200,000/- as the balance amount, on the expiry of 6 months from the date of supply, DEF LLC is eligible to reverse the output tax on the bad debts which was paid beforehand. The balance amount AED 1,200,000/- need to be written off as bad debts in their books of accounts and AED 60,000/- as its VAT to reverse the output tax. DEF LLC will then have to notify JKL LLC that the amount has been written off.
On being notified that the amount has been written off, JKL LLC has to reverse the input tax credit previously availed. They can reduce AED 60,000/- from the input tax credit displayed under line no. 9- standard rated expenses by disclosing under the column adjustment.