How does VAT bad debt relief work in the UAE?
Article 64 of the VAT Decree-Law lets a registered supplier reduce output VAT in the current period for VAT already paid on a supply, if the debt has been written off in its accounts, more than six months have passed since the supply, and it has notified the customer of the amount written off.
All four conditions
The supply was made and the VAT was charged and paid. The consideration was written off in full or in part as a bad debt in the supplier's accounts. More than six months have passed from the date of supply. The supplier has notified the customer of the amount written off. The relief equals the VAT on the amount written off.
The customer's side
A registered customer that claimed the input VAT and has not paid for over six months must reduce its recoverable input VAT once notified by the supplier. Main contractors who withhold payment from subcontractors should expect this adjustment.
Records needed
The supplier needs the invoice, proof the VAT was paid in a return, the accounting write-off entry and a copy of the notification. SupaJack Construct keeps the invoice, the VAT return and the journal entries, and the customer notice should be kept with them.
Related tools and guides
See the VAT guide for contractors, the VAT calculator, the payment certificate calculator, the retention calculator, finance and VAT in SupaJack Construct, the answer on whether a payment certificate triggers VAT and the meaning of e-invoicing.
Worked example
A subcontractor invoiced AED 300,000 plus AED 15,000 VAT on 1 January and paid the VAT in its return. By 15 July nothing has been received, so it writes off AED 100,000 of the debt and notifies the main contractor. It can reduce output VAT by AED 5,000 in the current period.
Questions people ask
How long must the supplier wait?
More than six months from the date of supply.
Must the customer be told?
Yes, notification is a condition.
Does the customer lose input VAT?
Yes, once notified and unpaid for over six months.