Bad Debt Relief Scheme - VAT Clarification published by the Federal Tax Authority
29 March 2021
The FTA has published a welcome reminder of the rules of the VAT bad debt relief scheme. This will be helpful to many taxpayers as the way in which the scheme works is sometimes misunderstood.
Subject to various conditions, the Bad Debt Relief scheme allows a taxpayer to claim a refund of VAT where the taxpayer has accounted for VAT on a supply of goods or services, but the customer has not paid for the supply. In brief the conditions are as follows:
- The goods and services should have been supplied and VAT on the supply should have been charged and accounted for.
- The consideration for the supply should have been written off in full or in part as a bad debt in the accounts of the supplier.
- More than six months should have passed from the date of the supply.
- The supplier should have notified the customer of the amount of consideration for the supply that has been written off.
The clarification explains how the FTA interprets each of these conditions. With regard to the second condition, the FTA confirms that Bad Debt Relief may only be claimed to the extent that the consideration is written off. To illustrate this, it uses an example where a supplier issues an invoice for AED 105 (AED 100 plus AED 5 VAT). If the supplier is not able to collect the entire debt and writes off AED 105, a bad debt adjustment of AED 5 can be taken. However, if the supplier collects 50% of the consideration and consequently writes off AED 52.5, a bad debt adjustment of only AED 2.5 can be taken.
This illustration is important as there are often misconceptions about how much can be claimed in cases of part-payment.
There are also some helpful comments regarding the notification to the customer. There is no set format for this notification, but the clarification advises that, as a minimum, it should include:
- Invoice number and date of the tax invoice which has not been paid by the customer.
- Amount of consideration that has been written off by the supplier.
The FTA expects the notification to be in writing – for example, by email or letter. It is not necessary to obtain an acknowledgement from the customer, but the taxpayer should be able to demonstrate that best measures were taken to notify the customer. Evidence to this effect, including copies of all documents must be retained.
The Bad Debt Relief scheme can be a useful relief, but it is essential that all the conditions are met. Anyone considering making a claim will find the guidance given in the clarification useful.
If you require further information on this topic, please get in touch with our indirect tax team, or your normal BDO contact.