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1 April 2021
Adjustment on account of Bad Debts Relief (BDR)

The Federal Tax Authority (FTA) has recently issued public clarification under UAE VAT law regarding the treatment and disclosure for adjustment to be made in books and returns on account of Bad Debts write-off.

We have summarized below, the key conditions to be fulfilled for writing off bad debts from books as discussed at length in the clarification:
 
  1. The goods and services should have been supplied and VAT should have been accounted for by the supplier in books of accounts and return. The same would also imply the payment of said VAT amount;
     
  2. The entire or part of the consideration, which has not been received, must have been written off from the books of accounts;
     
  3. More than six months should have passed from the date of supply, i.e., efforts should have been taken by the supplier to recover said amount; and
     
  4. The supplier must inform the customer in writing regarding the amount of consideration written off. The said communication could be through a letter, email, post, or any other similar mode. Further, there is no obligation to obtain an acknowledgment on the letter. The said documentation is required to justify the claim of reduction in output VAT liability.
 
Our Comments
  1. The most challenging condition to businesses would be that they may wish to pursue the recovery of debts from customers (i.e., rather than informing them that such debts have been written off), which would negate the applicability of BDR.
  2. The clarification has also resolved the manner of reporting said adjustments in return, i.e., reporting should be made in the ‘Adjustment column’ of Box 1 of the VAT Return, for each Emirate applicable.
The link to public clarification is attached below –
https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/VATP024 - Adjustment on account of Bad Debts - 17 03 2021
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