In the United Arab Emirates, registered businesses are able to recover VAT which is paid on purchases of products and services that are for business purposes. This applies when a business receives a tax invoice, and the business intends in making the payment for the supply that is within six months following the date of supply. But, a supplier will be required in paying VAT even when the consideration wasn’t received yet or settled by the recipient. As such, time of supply in relation to the goods is the earliest date of the transfer, date of the payment receipt or date of invoice.
On the other end of the spectrum, the supply recipient is in a position in recovering input VAT on basis of the tax invoice even when the consideration wasn’t paid yet but the intention to pay has been established within six months from the date of payment. The following situations can arise from this understanding:
- Recipient of supply recovered input VAT; however, failed in paying consideration within six months from date of supply
- Supplier paid VAT with the (FTA) Federal Tax Authority but hasn’t received consideration even after six months from date of supply
In order for the supplier to be safeguarded and to recover input VAT from the recipient, the Bad Debts Adjustment scheme has been incorporated with the UAE VAT legislation. Under this scheme, suppliers are allowed in reducing output liability in the VAT return. The recipient, correspondingly, has to reduce input VAT in the VAT return. For a supplier in the UAE to claim relief with the bad debts adjustment scheme, there’s a number of conditions that a recipient and a supplier have to meet.
In this article, we will provide you with the necessary information to help you meet the conditions for the FTA’s scheme for bad debts.
Conditions for Suppliers for Claiming Bad Debts
A registered business that supplies goods or services will be able to reduce output tax within the current tax period in order to adjust output tax that is paid on previous tax periods if the conditions listed below are met:
- Products and services supplied were provided and due tax has already been charged by the supplier and paid
- Supply consideration has been labeled or written off as bad debt (maybe full or in part) in the supplier’s book of accounts
- More than six months have already passed from the supply date
- Supplier already notified recipient of items and services on the considerable amount of the supply written off as bad debt
The conditions mentioned above imply that tax invoice has been issued by the supplier, the amount receivable from the supply recipient has been written off as a bad debt, six months have passed from supply date, and supplier has informed recipient on the amount written off as a bad debt by the supplier.
Conditions for Recipients under Scheme of Bad Debt Adjustment
Recipient of products and/or services has to reduce input tax for current tax period that is being claimed during a previous tax period in which consideration hasn’t been paid, plus the following conditions which are listed below are met:
- Registered supplier reduced output tax which was stated above
- Recipient has received notifications from supplier regarding consideration amount that’s written off
- Recipient received supply or goods and services with relevant input tax recovered with the previous VAT return
- Consideration wasn’t paid for supply provided for over six months
The conditions are similar to that provided by the law to the supplier. The recipient also has to reduce input tax in the VAT return which is applicable in the period wherein the notification(s) was received regarding the consideration and the amount written off by the supplier.
Only when the above-mentioned conditions are applicable to the recipient and the supplier is met can the scheme for bad debts adjustment be used. The amount to be reduced by both the recipient and the supplier has to be equal to the tax on a consideration which was written off. The aim of the provision is to provide supplier protection and for it to recover input VAT that’s recovered by the recipient earlier. This can be a process that’s difficult in practice, most especially without the help of VAT specialists in UAE as debts are often written off because of non-traceability of the recipient.
Also Read: VAT Return Filing: Why Outsource To Experts
Regulated Tax Agents in UAE
We know you would want further clarification on VAT legislation in UAE, particularly the newly introduced scheme of bad debts adjustment in UAE. At VAT Registration UAE, our team of regulated tax agents in UAE can hear your issues surrounding VAT and help ensure they are duly addressed by specialists. The firm has over three decades of experience operating in the country and providing a broad range of solutions to its clients. Regardless of your need or requirement related to Value Added Tax in UAE, don’t hesitate to contact us!