In the UAE VAT, if a tax invoice has been received and the supply price has been paid or intends to be paid within 6 months after payment, the registered enterprise can recover the VAT paid for the purchase of goods and services for commercial purposes. The agreed date of payment for goods. However, even if the supplier does not receive the consideration from the payee, VAT must be paid. This is because the supply time of the goods is the earliest transfer date, invoice date or payment receipt date.
On the other hand, even if the price is not paid, the supplier can recover the input value-added tax based on the tax invoice, but intends to pay within 6 months after the payment due date. Based on this understanding, the following situations may occur:
1. The supplier has paid VAT to the FTA, but has not received the consideration even after six months from the date of supply.
2. The supplier has recovered the input value-added tax, but has not paid the consideration within 6 months after the supply due date
In order to protect the supplier and recover the input VAT from the consignee under the above-mentioned circumstances, the UAE VAT Law has introduced a scheme called “bad debt adjustment”. Under the bad debt adjustment program, suppliers are allowed to reduce the output liabilities in their VAT returns. Accordingly, the recipient must reduce the input VAT in their VAT returns during the period when the above situation occurs. However, in order for suppliers to request reductions and exemptions in accordance with the bad debt plan, there are a series of conditions that both parties must meet.
Let us discuss the conditions that the supplier and the recipient must meet under the bad debt adjustment program.
Supplier’s requirements for bad debt adjustment
If all of the following conditions are met, the registered supplier can reduce the output tax during the current tax period to adjust to the output tax paid in any previous tax period:
1. Goods and services have been provided, and taxes have been collected and paid
2. The consideration for the supply has been fully or partially offset as a bad debt in the supplier’s accounts
3. It has been more than six (6) months since the date of supply
4. The supplier has notified the recipient of the goods and services of the consideration for the cancelled supply.
The above conditions mean that if a tax invoice is issued, six months from the date of supply, the payee’s receivables should be written off as bad debts. More importantly, the supplier has notified the receiver of the amount The payer writes off as bad debts.
Conditions for payees under the Bad Debt Adjustment Plan
During any previous tax period where no consideration has been paid and all of the following conditions are met, the recipient of the goods or services shall reduce the claimed input tax for the current tax period:
1. The registered supplier has reduced the output tax as described above, and the payee has received the supplier’s notice on the cancellation of the consideration.
2. The consignee received the goods and services, and recovered the relevant input tax in the previous VAT return.
3. The supply price has not been paid for more than (6) six months.
The conditions are very similar to those of the supplier. Here, the recipient must reduce the input tax in its VAT return within the period of receiving the notification of the supplier’s cancellation of the consideration.
Only when all the above-mentioned conditions applicable to suppliers and recipients are met can adjustments under the bad debt plan be made. In addition, the reduction of the supplier and the recipient should be equal to the cancelled consideration tax. Although the purpose of this regulation is to protect the supplier and collect the input VAT collected by the consignee early, sometimes the process of communicating with the consignee actually becomes difficult. This is because in most cases, the debt is written off because the payee cannot be traced.