Many a time the supplier after providing the supply of goods or service do not receive the money for the supply from the recipient of goods or service either in full or part.
ARTICLE 64 of the Decree-Law specify
The adjustment on account of bad debts if all the following conditions are met:
- Supplier of goods and services has written off the amount receivable from the recipient in full or part in its books.
- More than 6 months have passed from the date of supply.
- The supplier has notified the recipient that the amount due of consideration for the supply is written off.
- The tax has been charged and paid by the supplier.
Example: Supplier located in Dubai, raised an invoice for the supply dated 01.02.2018 having taxable value as AED 5000 and VAT charged at 5% amounting to AED 250. Let us assume that six months have passed and the supplier is yet to receive the total amount of consideration due on the invoice raised on 01.02.2018. Since the amount is not receivable i.e the recipient of goods or services has not yet paid the amount and it is not expected that amount shall be received in future, the supplier decides to write off the amount due in his books. The supplier accordingly sends a communication to the recipient stating the fact about writing off of the amount due.
|Conditions for write off||Check|
|Supplier of goods and services has written off the amount receivable from the recipient in full or part in its books|
|More than 6 months have passed from the date of supply|
|The supplier has notified the recipient that the amount due of consideration for the supply is written off|
|The tax has been charged and paid by the supplier|
After fulfilling all the conditions, the supplier shall reverse the tax paid on the initial supply in the month in which the conditions are met. Effect of such write off shall be a reduction in the output tax liability of the supplier and increase in the liability of the recipient (reduction in the recoverable input tax).
For example the total tax liability of the supplier for the month of February was AED 7000 which value includes VAT paid on the taxable of AED 5,000 also i.e AED 250. Assuming September (Month in which supplier decides to write off the amount receivable) liability to be AED 8000. When the supplier decides to write off the amount receivable the VAT already paid on the sale i.e AED 250, the amount of VAT already paid shall be reduced from the total liability payable for the month of AED 8000 and only AED 7750 shall be paid to the government.
Summary of the effect:
|Before write off||For supplier (AED)||For recipient (AED)|
|Net VAT payable||2,000||2,000|
|After write off||For supplier (AED)||For recipient (AED)|
|(-)VAT on write off||250||–|
|Net output (a)||7,750||6,000|
|(-)VAT on write off||(250)|
|Net input (b)||5,000||3,750|
|VAT payable (a-b)||2,750||2,250|
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