VAT Bad Debt Relief in the UAE: Reclaiming VAT on Unpaid Invoices

UAE VAT has a quiet trap for any business that invoices on credit. Because output tax is due when you raise the invoice — not when the customer pays — you can hand 5% to the Federal Tax Authority on a sale, then never collect a dirham of it. VAT bad debt relief is the mechanism that lets you claw that VAT back. It is well-established in the law, genuinely useful for cash flow, and — in our experience — one of the most under-claimed reliefs in the system, almost always because businesses miss one of its four conditions.

This guide sets out exactly how bad debt relief works under Federal Decree-Law No. 8 of 2017, the four conditions you have to satisfy, the step that trips most claimants up, and the mirror obligation that catches you when you are the one who has not paid.

What bad debt relief actually recovers

When you make a standard-rated supply, you charge 5% VAT and account for it to the FTA in that tax period, regardless of whether the customer has paid. If that customer then defaults, you are left having paid output tax on income you never received. Bad debt relief fixes the mismatch: it lets a registered supplier reduce its output tax in a current tax period to recover the VAT it paid on an earlier supply that has gone bad. You are not writing off the whole invoice through VAT — only recovering the tax element. The commercial loss on the net amount is a separate matter for your accounts and your accounts receivable process.

The four conditions — all of them

The relief lives in Article 64 of the VAT Decree-Law, and Article 64(1) sets out four conditions that must all be met before a supplier can reduce output tax:

1. The VAT was charged and paid. The goods or services were supplied, and the due tax was charged and accounted for to the FTA. You cannot reclaim VAT you never paid over in the first place.
2. The debt is written off in your accounts. The consideration has been written off, in full or in part, as a bad debt in the supplier’s accounts. This is an accounting action — a genuine write-off, not a note in the margin.
3. More than six months have passed from the date of the supply. Note the reference point: it is the date of supply under the VAT tax-point rules, not the invoice due date or the date you gave up chasing.
4. You have notified the customer of the amount of consideration written off.

The notification is not a demand for payment and it does not need the customer’s agreement. It is a one-way notice, and its purpose is evidential: it fixes the amount and the moment of the write-off so the position is auditable. Keep the sent record with the write-off entry.

How to make the adjustment

Once the four conditions are met, the recovery is a return adjustment, not a refund application. The FTA’s guidance in Public Clarification VATP024 is specific: make the adjustment in the adjustment column of Box 1 (standard-rated supplies) of your VAT return, enter the VAT amount only — not the net value of the invoice — and report it per Emirate where relevant, matching how the original output tax was reported.

[[chart:bad-debt-timeline]]

That last detail matters for multi-Emirate businesses: because standard-rated supplies are reported by Emirate, the reversal has to follow the same split as the original sale. Getting this right is part of what a disciplined VAT return process should handle as a matter of routine, rather than a scramble at filing time.

Bad debt relief is not a credit note

A frequent mix-up is to reach for a credit note when a customer does not pay. The two are different instruments for different situations. A credit note reduces or cancels a supply that has genuinely changed — the price was renegotiated, goods were returned, the order was cut back. It adjusts the value of the supply itself, and both sides re-account for the VAT on the revised figure. Bad debt relief, by contrast, is for a supply that stands exactly as invoiced but simply was not paid: the sale happened, the price is unchanged, the customer defaulted. Issuing a credit note to write off a non-paying customer misstates what occurred and can distort both parties’ returns. If the supply is unchanged and the money never arrived, bad debt relief — not a credit note — is the correct route.

The mirror rule: when you are the customer

Bad debt relief is often read as a one-way benefit for suppliers. It is not. Article 64(2) imposes the opposite obligation on the buyer. If you recovered input tax on a supplier’s invoice but have not paid the consideration within six months, and the supplier has written the debt off and notified you, you must reduce your recoverable input tax — in effect, repay the VAT you claimed.

There is a related timing rule that bites even earlier. The input-tax recovery rules only treat you as having “paid” for a supply to the extent you intend to pay within six months of the agreed payment date. So a long-overdue payable you have already recovered VAT on needs revisiting regardless of whether the supplier ever sends a bad-debt notice. If you routinely recover input VAT on purchases, your payables ageing is a VAT exposure, not just a cash-flow report — a point our note on input VAT recovery in the UAE develops further.

A worked example

Say you invoiced a customer AED 105,000 for a standard-rated service — AED 100,000 net plus AED 5,000 VAT — and accounted for the AED 5,000 output tax in the return for that period. Eight months later the customer has still not paid, you write the AED 105,000 off as a bad debt in your accounts, and you send written notice of the amount written off. All four conditions are now met, so in your next return you reduce output tax by AED 5,000 through the Box 1 adjustment column. The AED 100,000 net loss is a commercial write-off in your accounts; VAT relief only ever touches the tax.

Partial recovery works the same way, proportionately. If the customer pays AED 42,000 of that AED 105,000 and you write off the remaining AED 63,000, you have written off three-fifths of the debt — so you recover three-fifths of the VAT, AED 3,000, not the full AED 5,000. And treat the relief as a live position, not a closed one: if a customer later pays a debt you have already claimed relief on, the VAT has to be brought back into account, because the FTA expects the tax position to follow the money in both directions.

Common mistakes we see

• Claiming too early. The six months run from the date of supply. Businesses sometimes claim as soon as an invoice is 90 days overdue, which is premature.
• No written-off entry. A provision for doubtful debts is not the same as writing the debt off. The condition is a write-off in the accounts, in full or part.
• No notification, or an undocumented one. A phone call you cannot evidence will not survive a review. Send it in writing and keep it.
• Adjusting the wrong figure. Only the VAT element goes in the Box 1 adjustment column — not the net or gross invoice value.
• Ignoring the buyer-side rule. Businesses claim relief as suppliers but never apply Article 64(2) to their own overdue payables, leaving an input-tax overstatement on the books.

Where this leaves you

Bad debt relief is worth claiming — for many SMEs it is real, recoverable cash sitting in written-off receivables — but only if the four conditions are documented at the moment the debt goes bad, not reconstructed months later under an FTA query. The practical fix is process: tie the customer notification and the Box 1 adjustment to the write-off itself, and review payables ageing for the mirror obligation every quarter.

This is core to what our VAT services in Dubai team does inside the monthly cycle — identifying eligible bad debts, preparing the notifications, making the Box 1 adjustments correctly, and applying the Article 64(2) rule to overdue payables so the return is right on both sides. Where slow payment is the underlying problem, our accounts receivable and payable management service tightens collections before debts reach write-off, and clean accounting and bookkeeping keeps the write-off trail auditable. If you are still getting the basics in place, start with VAT registration in the UAE.

Disclaimer: This article is published by Velmont Crest, a DED-licensed UAE accounting firm. We are not a tax agent, an FTA-registered representative, or a licensed financial services firm. The content above is general information only and does not constitute tax, legal or financial advice. VAT positions depend on the specific facts of each business and the Federal Tax Authority retains the right to assess and challenge any adjustment. Decisions about bad debt relief and your VAT returns should be taken with reference to Federal Decree-Law No. 8 of 2017, its Executive Regulation, FTA Public Clarification VATP024 and your own qualified advisors.

References

• Federal Decree-Law No. 8 of 2017 on Value Added Tax
• FTA Public Clarification VATP024 — Adjustment on Account of Bad Debt Relief
• The UAE Government — Filing a VAT return