VAT Bad Debt Relief in UAE: How to Recover VAT on Unpaid Customer Invoices

You issued an invoice, paid the VAT to the government, and waited for your customer to pay. Six months later, the invoice is still outstanding. Can you recover the VAT?

In certain circumstances, yes.

VAT bad debt relief in the UAE allows eligible VAT-registered suppliers to adjust the output VAT previously accounted for on unpaid customer invoices.

However, an overdue invoice alone is not enough. Specific conditions must be satisfied before the adjustment can be made.

For Dubai and UAE businesses facing delayed customer payments, understanding these rules can help protect cash flow while maintaining VAT compliance.

What Is VAT Bad Debt Relief in the UAE?

Under Article 64 of the UAE VAT legislation, a VAT-registered supplier may be able to reduce previously accounted-for output VAT when an eligible customer debt becomes bad.

Consider a simple example.

A Dubai trading company sells goods worth AED 10,000 plus AED 500 VAT. The invoice totals AED 10,500.

The company accounts for the AED 500 output VAT in its VAT return, even though the customer has not paid the invoice.

If the debt remains unpaid and all relevant bad debt relief conditions are met, the business may be able to adjust that AED 500.

This is not an automatic VAT refund. It is an adjustment made through the VAT return.

The Four Conditions for VAT Bad Debt Relief

The Federal Tax Authority (FTA) has clarified four essential requirements.

1. Goods or services were supplied and VAT was accounted for

The company must have made the relevant taxable supply, charged VAT, and accounted for the tax through its VAT returns.

You cannot claim relief for VAT that was never properly accounted for.

2. The unpaid amount has been written off

The business must write off the relevant unpaid consideration, fully or partially, as a bad debt in its accounting records.

Simply moving an invoice into an overdue receivables report does not necessarily satisfy this requirement.

The accounting treatment must demonstrate that the debt has actually been written off.

3. More than six months have passed since the date of supply

More than six months must have passed from the applicable VAT date of supply.

The six-month period should not automatically be calculated from the contractual payment deadline.

Businesses must identify the correct VAT date of supply, which may depend on the transaction and applicable tax rules.

4. The customer has been notified

The supplier must notify the customer of the amount of consideration written off.

According to FTA clarification VATP024, the notification should identify the relevant tax invoice and written-off amount.

Businesses should retain evidence that appropriate notification steps were taken.

Important: All four requirements must be satisfied. Fulfilling only the six-month condition is insufficient.

How Much VAT Can a Business Adjust?

The amount depends on how much of the original VAT-inclusive consideration has been written off.

Illustrative examples assume the original supply was subject to 5% VAT, that the amounts shown are VAT-inclusive, and that all relief conditions are met.

For an eligible standard-rated invoice, the VAT portion of the VAT-inclusive written-off amount can be calculated as:

VAT adjustment = Written-off VAT-inclusive amount × 5 ÷ 105

A company should verify the original VAT treatment and any partial payments before making the calculation.

How to Claim VAT Bad Debt Relief in the UAE

Step 1: Review outstanding receivables

Prepare an ageing report covering unpaid customer invoices.

Identify invoices potentially eligible for the relief and verify the relevant dates of supply.

Step 2: Reconcile customer balances

Compare the sales ledger, bank receipts, customer statements, and credit notes.

Confirm whether the outstanding amounts have been partially paid, disputed, or otherwise adjusted.

Step 3: Process the accounting write-off

Record the approved bad debt write-off in the accounting system.

The amount written off should agree with the records supporting the intended VAT adjustment.

Step 4: Notify the customer

Send a clear notification showing the relevant invoice number, invoice date, and amount written off.

Keep supporting communication evidence.

Step 5: Prepare the VAT return adjustment

FTA guidance VATP024 explains that bad debt relief is reported in the Adjustment column of Box 1 of the VAT return, using the applicable emirate allocation.

Only the relevant VAT amount should be entered as the adjustment.

Step 6: Retain supporting documents

Store the calculation, sales invoice, receivables reconciliation, write-off record, customer notification, and supporting correspondence.

If a customer subsequently pays an amount previously written off, the business must consider the resulting VAT implications and make any required adjustment.

Why Businesses Often Miss This Relief

Many companies focus exclusively on collecting overdue invoices, without evaluating the related tax consequences.

This can result in VAT previously accounted for remaining unadjusted even when the business qualifies for relief.

Other common mistakes include:

• Treating every invoice older than six months as eligible
• Making adjustments without recording a proper write-off
• Failing to notify customers
• Claiming VAT relief on amounts already collected
• Reporting the adjustment in the wrong VAT return field

An effective monthly receivables review can identify potential issues before the next VAT filing.

How Young & Right Can Help

Young & Right Accounting & Tax Consultancy provides support with bookkeeping, VAT reconciliations, VAT filing, and tax advisory.

Our team can help review aged receivables, examine potential bad debt relief eligibility, reconcile VAT records, and prepare supporting documentation.

Explore our VAT Compliance Services for assistance with your VAT obligations.

Have Unpaid Invoices Affecting Your VAT Position?

Your unpaid invoices may create cash flow pressure, but eligible VAT adjustments should not be overlooked.

Let Young & Right review your receivables, identify potential relief, and help you prepare compliant VAT calculations.