VAT Adjustment Relating to Bad Debt Relief
There can be many scenarios in the business, where a supplier has to opt for a write off of a receivable amount from a customer for which VAT has already been paid to FTA. In such circumstances as the write off amount including applicable VAT hits the accounts of the supplier as an expense, there is an option available in the regulation, facilitating the supplier to reclaim the VAT amount relating to such write offs as a VAT adjustment in the subsequent VAT return. FTA has clarified in detail the conditions to be met and considerations to be given by the supplier in such contexts. In this section we will discuss more about VAT adjustments relating to bad debt relief.
Conditions to be met by the supplier to apply VAT adjustment relating to bad debts
There are certain conditions as listed below as clarified by FTA, which has to be met for making a reclaim adjustment of VAT relating to bad debt by a supplier:
- There should have a supply of goods or service already made for which a proper tax invoice with appropriate VAT charge was issued, accounted in the books and reported,
- The receivable amount with respect to the supply is written off fully or partly in the accounts of the supplier,
- It should have been six months or more since the date of the supply and
- A proper communication has been made by the supplier with the customer informing the receivable amount which is written off.
How can a supplier ensure that the condition relating to proper accounting and payment of VAT is met?
Suppliers can only claim for adjustment of VAT relating to bad debt relief relating to those supplies where they were properly invoiced on time as per the VAT regulation, included in the applicable VAT return and the required VAT payment already made to FTA. When a receivable amount is written off as bad debt, in order to proceed with the reclaiming of the respective VAT amount from FTA, the supplier has to ensure these factors are completed and sufficient records are maintained to evidence the same. This highlights the importance of following proper VAT accounting and timely reporting requirements to ensure any such subsequent reclaim adjustment stands valid.
Also Read: Impact of Bad Debts on Businesses
How can a supplier ensure to meet the condition relating to communicating the customer about the bad debt write off?
The regulation does not specify any particular communication method to be followed, however FTA clarifies that if the supplier sends the communication through letter, email, post or any other similar ways that will suffice the requirement to fulfill this condition. It is to be noted that the supplier does not need to receive back any acknowledgement from the customer for the communication relating to write off of the receivable amount. What is important is that the supplier should maintain the records sufficient enough to prove that the diligent efforts to communicate with the customer in this regard is made.
Where can a supplier make the VAT adjustment relating to bad debts?
Once the eligibility to claim for VAT adjustments relating to bad debt relief is established, the supplier can proceed with making respective VAT adjustments in the VAT return of that period. There is an “adjustment column” in VAT return of Box 1, where the amount of VAT for which the claim is made has to be inserted. If the supplies made are relating to multiple emirates, the bad debt amounts have to be reported in the adjustment box of respective emirate. This makes it important to account for even the amounts of bad debts as and when they occur with segregation of emirate wise data, so that reporting in VAT return will be easier.
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CDA has been excelling in providing bespoke VAT consultancy services relating to VAT accounting and reporting in UAE across various sectors and industries. Apart from the support on routine VAT functions, we offer customized advisory services for tackling specific VAT challenges faced by business entities. If you are engaged in business operations in UAE, we are happy to provide you with our value adding partnership as your advisors on VAT related matters. Our locally available VAT experts can promptly answer your queries and guide you on implementing proper VAT governance in a controlled environment, in compliance with the regulatory requirements of the region.