Federal Tax Authority (‘FTA’) has issued a public clarification which discusses the conditions which must be met in order to benefit from the Bad Debt relief scheme. The key takeaways from the said public clarification have been mentioned hereunder:
Where a VAT registered supplier supplies goods or services to its customers but is not paid (wholly or partially) within a specified period, such supplier may be able to adjust the VAT on the bad debts, subject to meeting the conditions prescribed in Article 64(1) of the Federal Decree Law No. 8 of 2017 on Value Added Tax (‘Decree-Law’).
Conditions which must be met in order to benefit from the Bad Debt relief scheme:
VAT should have been accounted for and paid on the supply: –
- This condition will be considered as satisfied where the supplier has charged VAT on the tax invoice and has also accounted for VAT to the FTA via its tax returns.
Consideration for the supply should have been written off: –
- It mandates the supplier to write off whole or part of the consideration for the supply as a bad debt in its accounts.
- In case where only a part of consideration is written off, a bad debt relief can be taken only to the extent of such written off consideration.
More than six months should have passed from the date of supply: –
- The supplier must wait for six months from the date of supply to initiate the process of bad debt adjustment.
- During the course of these six months, the supplier should engage with the customer to recover the debt and collect the outstanding amount.
Notification to the customer stating the consideration for the supply which has been written off: –
- The supplier must notify the customer of the amount of consideration that has been written off.
- The notification to the customer must include at least the Tax Invoice number and Date of the Tax Invoice which has not been paid as well as the amount of consideration written off.
The Public clarification further specifies that the notification can be sent via a letter, email, post, or any other similar communication.
- An acknowledgement of receipt of notification from the customer is not necessary for the supplier to receive before taking the bad debt adjustment, however, a supplier needs to evidence documentation and/or that best measures were taken to notify the customer.
Mechanism to claim bad debt relief:
Adjustment in relation with bad debt relief should be made in the “Adjustment column” of Box 1 of the VAT Return. The adjustment amount should be the VAT amount only and should be reported for each Emirate, where applicable, in accordance with the respective Output Tax amount being adjusted.
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This document has been prepared as a general guide. It is not substitute for professional advice. Neither PKF UAE nor its partners or employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document.
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