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.

Laid against the statute, each condition has a matching piece of evidence. The table below sets the published wording beside what a UAE file actually has to contain, checked against the Ministry of Finance text of the Decree-Law on the date shown.

Source: Federal Decree-Law No. 8 of 2017 and its amendments, as published by the Ministry of Finance.

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.

There are two Article 64s, and they are not the same rule

This is worth stopping on, because it has misled more than one adviser. UAE VAT runs on two instruments: the Decree-Law itself, and the Executive Regulation issued as Cabinet Decision No. 52 of 2017. Both are numbered from Article 1, so both have an Article 64 — and they say entirely different things.

Article 64 of Federal Decree-Law No. 8 of 2017 is the bad debt relief rule set out above. Article 64 of the Executive Regulation is headed “Tax Return and Payment” and fixes the 28-day filing and settlement deadline. It has nothing to do with bad debts. Citing the wrong one in a file note, in FTA correspondence or in a client memo is an unforced error that undermines everything else in the document.

The practical rule for anyone drafting in the UAE: name the instrument as well as the article. “Article 64 of the VAT Decree-Law” is unambiguous; “Article 64” on its own is not.

Provision, write-off, and the entries behind condition two

Condition two is where accounting and VAT meet, and it is worth being precise about it, because a provision and a write-off are not the same act. A provision for doubtful debts — an allowance for bad debts, in the other common wording, and an expected credit loss allowance under IFRS 9 — is an estimate. It says some portion of the ledger will probably go bad without naming which invoices. A write-off is specific: you have concluded that a named customer’s named invoice will not be collected, and you remove it from receivables.

Article 64(1)(b) asks for the consideration to have been written off as a bad debt in the supplier’s accounts. A general provision does not do that, however prudent the estimate behind it. This is the practical reason so many claims fall over on paper that looks compliant: the finance team booked a year-end allowance, the auditor was satisfied, and no individual debt was ever actually written off, so there is nothing to point at when the FTA asks which invoice the relief relates to.

The bad debts journal entries themselves are ordinary double entry:

Bad debts recovered is the one people meet least often and mishandle most. If a customer settles a debt you had already written off, the cash comes back through income rather than reversing quietly against receivables — and on the VAT side, relief you have already claimed on that debt has to be brought back into account. The accounting entry and the VAT adjustment are two separate actions on the same event, and doing only the first is a common way to end up understating output tax.

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.

A dated walkthrough: when the six months are actually up

Condition (c) is the one businesses get wrong by weeks rather than by months, because they count from the wrong event. Take a Dubai consultancy on quarterly tax periods that supplies a client on 12 March 2026, invoices the same day for AED 210,000 including AED 10,000 of VAT, and gives 60-day terms.

Read across the table and the trap is obvious. A business anchoring on the 11 May due date would think it could claim from 11 November; a business anchoring on the 90-day collections trigger would claim in August and be too early. The statute anchors on 12 March, and nothing else.

The date of supply itself is fixed by the tax-point rules in the VAT Decree-Law, not by the invoice date, so it is worth recording it on the invoice record at the moment of sale. For staged or continuous supplies it can differ from the invoice date by a full period, which quietly moves every downstream date in the table above.

The buyer’s side, condition by condition

Article 64(2) is the mirror, and it has its own three conditions rather than simply inverting the supplier’s four. All three must be met before a UAE buyer is required to reduce its recoverable input tax.

Sitting behind that is a rule that bites earlier and independently. Article 54 of the VAT Executive Regulation treats a buyer as having paid consideration only “to the extent that the Taxable Person intends to make the payment before the expiration of six months after the agreed date for the payment for the supply.” So a UAE payable you have no realistic intention of settling within six months of its agreed date is already an input-tax problem, whether or not the supplier ever writes it off.

That is why we tell clients to run the payables ageing as a VAT control, not just a treasury report. Any balance past six months from its agreed payment date is a candidate for reversal, and the FTA does not need the supplier’s notice to raise the question.

How long the bad-debt file has to survive

Relief claimed in 2026 can be tested years later, and the file has to still exist. UAE retention periods sit across three instruments, so the answer depends on what the record is rather than on a single number.

The two real-estate rows are not a contradiction. Article 3(1) of Cabinet Decision No. 74 of 2023 opens with “unless the Tax Law states otherwise”, and for VAT the Tax Law does: the Decree-Law delegates VAT record time limits to its own Executive Regulation, and Article 71(2) of that Regulation sets 15 years for real estate. Article 71 was itself amended by Cabinet Decision No. 100 of 2024, and the fifteen years was left standing.

For a bad-debt file specifically, the practical answer is to keep the invoice, the write-off journal, the customer notification and any later receipt together as one bundle, and to run the clock from the tax period of the adjustment rather than from the original sale. Extending an FTA dispute or audit stretches everything by four more years, so a file that is only just old enough to destroy usually should not be.

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.

Article 64(3) is what makes that arithmetic mandatory rather than a convention: the reduction “shall be equal to the Tax related to the Consideration which has been written off.” The VAT recovered can never exceed the tax embedded in the amount actually removed from receivables.

The same customer, three invoices, one messy ledger

The proportionate rule gets harder to see when a single UAE customer owes several invoices and pays something on account. Take a Sharjah trading company owed AED 315,000 across three standard-rated invoices, all more than six months old, where the customer has paid AED 84,000 with no allocation instruction.

Two points fall out of the table. The allocation decides the answer, so it has to be made, documented and applied consistently rather than left implicit — an unallocated receipt spread pro rata across all three invoices gives a different, and equally defensible, split, but you cannot have both. And the relief is claimed invoice by invoice, because condition (d) requires the customer to be told the amount written off, which only means something at invoice level. A single notice can cover all three, provided it identifies each invoice and each written-off amount.

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