The amount outstanding from the customers (Receivables)
Due to the current business environment, most of the businesses experiencing cash flow problems since customers do not pay their bills on time, and few may not pay them at all. Hence, all the businesses face this difficulty of not getting dues on time but also need to pay 5% of the receivable balance from the company money. VAT registered business only avail 28 days after the due VAT period to manage the cash flow to make the payment to FTA. We will look into the details, where businesses can claim paid VAT from the FTA for the balances that did not receive the cash. Also, FTA needs business to evaluate the non-payment of long outstanding balances to adjust the VAT return to reflect actual input VAT.
According to Article 64 (1) of the Federal Decree-Law No. 8 of 2017 on Value Added Tax, the registrant can do the adjustment on bad debts in their VAT return if they are eligible to claim bad debts relief. Public clarification VATP024 stated the conditions which must be met to benefit from the Bad Debt relief scheme.
The conditions for bad debt relief
To take advantage, the business must satisfy the following conditions
Goods and Services have been supplied and the Due Tax has been charged and paid to FTA. This condition will be satisfied where the supplier has charged VAT on the tax invoice and has also accounted for in the books of accounts. Also, VAT has been recorded in the appropriate VAT return and paid to FTA.
Consideration for the supply has been written off in full or part as a bad debt in the accounts of the supplier. It is important to note that bad debt relief can only be taken to the extent of the consideration written off in the accounts. Therefore, if only a part of the consideration is written off, bad debt relief can be taken only to the extent of such written off consideration.
More than six (6) months have passed from the date of the supply. This means that a supplier must wait for six months from the date of supply to initiate the process of bad debt adjustment. The FTA considers that during these six months, the supplier should engage with the customer to recover the debt and collect the outstanding amount.
The Registrant supplier has notified the Recipient of Goods and the Recipient of Services of the amount of consideration for the supply that has been written off. The FTA considers that the notification issued to the customer is a must and at the minimum below content should be maintained.
FTA considers the requirement of notifying a customer will be satisfied where a supplier sends a letter, email, post, or any other similar communication to the customer stating the amount of consideration that has been written off. Evidence documentation were taken to notify the customer must be retained.
Mechanism to claim bad debt relief
Any adjustment on account of 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, following the respective output tax amount being adjusted.
What should the recipient need to do if received a bad debt written off notification
The recipient of goods or services should reduce the input tax for the current tax period being claimed during any previous tax period where the consideration has not been paid and all of the following conditions are met;
The conditions are fairly similar to that of the supplier. Here, the recipient has to reduce the Input tax in the VAT return, for the period in which has received the notification about the consideration being written off by the supplier.
The amount not paid for the suppliers (Payables)
As per public clarification VATP017, if the taxable person has recovered the input tax on the tax return but has failed to make the payment before the expiration of six months after the agreed date of payment, the taxable person should reduce the input tax in the VAT return following to the expiry of the six months. However, this input tax will be recoverable once the taxable person makes the payment.
All the registered businesses must evaluate both the side of receivables and payables at each VAT return period. Age analysis of debtors and creditors need to obtain and consider the days of sales and purchase at each VAT period to update adjustments in the VAT return must be performed as per the VATP024 and VATP017. If you need any assistance, we Crevaty tax consultants can assist you on the same.
Source of information
Public clarifications VATP024 & VATP017
Article 64 (1) of the Federal Decree-Law No. 8 of 2017 on Value Added Tax