During these trying times of Covid-19 and its impact on the financial affairs and revenue of numerous companies, an interesting method of recovering a little bit of extra cash is by applying the provisions of Article 64 of the Federal Law No (8) of 2017 on Value Added Tax (the "VAT Law").
Article 64 of VAT Law makes provision for the recovery of output VAT charged by the supplier of the goods or services which is registered under the provisions of the VAT Law (the "Supplier") and who has paid the output VAT to the Federal Tax Authority (the "FTA") on the supply of goods or services that are considered to be classed as "bad debt", subject to certain conditions imposed by the VAT Law being in place.
A "bad debt" can be considered to be any amount due from the recipient of goods or services (the "Customer") which is not paid and the Customer who has rejected the payment for whatever reason, including a dispute arising from the terms of delivery, the product quality and even the discontinuation of business by the Customer.
To explain the background we advise that in the normal course of events:
– at the time of supply, the Supplier charges VAT to the
Customer and the amount of VAT will be shown as output VAT in its
– the amount of the due VAT is accordingly paid on or before the due payment date, after adjustment against Input VAT, to the FTA in the respective VAT return period;
– as a result of the above scenario, the Supplier can be placed in a financially onerous situation whereby the Supplier has paid the VAT to the FTA however the VAT has not yet been received by the Supplier from the Recipient.
Article 64 of the VAT Law provides that a Supplier can reduce the amount of its output VAT for amounts of VAT considered to be "bad debt" if the following conditions are satisfied by the Supplier:
– the Supplier has written off the receivable amount as a
"bad debt" in the Supplier's books of account;
– the Supplier has notified the Customer that the amount of consideration for the supply has been returned off; and
– the receivable amount is due to the Supplier for more than six (6) months old from the date of supply to the Customer.
In the event that the Supplier complies with ALL the requirements mentioned above, the Supplier can request the FTA for the "refund" through the adjustment of the output VAT amount in the tax return for the tax return period that the "bad debt" is written off.
The Customer's responsibility in the event that the Supplier has written off any amount due to the Supplier by the Customer as "bad debt" and the abovementioned conditions have been met, the Customer must reduce its input tax by the amount of the VAT reflected in the letter to the Customer by the Supplier, by inclusion of this reduction in the tax return for the next tax return period.
Practically, the adjustments are reflected in the tax return as follows:
– in the case of the Supplier:
In the VAT Return form (VAT 201 form) there is a column named "Adjustments" under the section "VAT on sales and other output 1(a) to 1(g)g". This column is used for reducing the output tax as a result of 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 in accordance with per Emirate reporting as initially declared as output VAT.
– in the case of Customer:
If the Supplier considers an unpaid tax invoice as "bad debt" and the Supplier notifies the Customer thereof that the Supplier is going to recover the output tax through his VAT return, the Customer has the responsibility to make the adjustment in their 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 debt" which the Customer has not paid but claimed as input earlier has to be deducted from the current period input tax.
Originally published by BSA Ahmad Bin Hezeem & Associates, September 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.