VAT on bad debts in the UAE: how to claim relief on unpaid invoices

What is VAT on bad debts in the UAE?

VAT on bad debts UAE refers to the relief that lets a VAT registered supplier recover output VAT already paid to the Federal Tax Authority (FTA) on an invoice the customer never paid. The supplier reduces output tax in a later VAT return once strict conditions are met. The customer must reverse the matching input tax.

This rule keeps Value Added Tax (VAT) neutral for businesses. You should not be out of pocket for tax on revenue you never collected. The relief sits inside UAE VAT law and is one of the most useful edge cases for finance teams managing aged receivables.

Below we explain who qualifies, the six month rule, what counts as a written off debt, and how to record the adjustment in your VAT return. We also cover what the customer side must do, common mistakes, and how bad debt relief sits next to refunds and deregistration in the wider VAT framework.

Legal basis for bad debt VAT relief

The UAE charges VAT at 5% under Federal Decree-Law 8 of 2017. The standard rate has applied since January 1, 2018. The bad debt relief mechanism is set out in Article 64 of the VAT law and clarified in FTA Public Clarification VATP024.

The relief is available to the supplier. The customer has a mirror obligation to repay input tax under Article 55 if they fail to pay a supplier within six months of the agreed payment date.

Who can claim VAT on bad debts

To claim bad debt relief, all of the following must be true:

• You are a VAT registered supplier with a valid Tax Registration Number (TRN).
• The supply was a taxable supply of goods or services.
• You charged and accounted for the output VAT in an earlier VAT return.
• The consideration has been written off in your accounting books as a bad debt.
• More than six months have passed from the date of the supply.
• You have notified the customer in writing of the amount written off.

All six conditions must be met. Missing any one of them blocks the claim until the gap is fixed.

What does not qualify

Relief is not available where the supply was zero rated or exempt, since there was no output VAT to recover. It is also not available where you simply gave a discount, settled at a lower value, or wrote the debt off as a commercial gesture before six months passed.

The six month rule explained

The six month period is the most common point of confusion. It runs from the due date of payment under the contract, not from the invoice date, unless the contract is silent. If your standard terms are net 30, the six month clock starts at day 31, not at invoice issue.

You can only claim relief in the VAT return that covers the date when all conditions are first satisfied. You cannot claim earlier, and waiting too long without action can complicate the bookkeeping.

How the supplier claims the relief

The relief is taken in your VAT return as a reduction of output tax for the period in which all conditions are first satisfied. It is not a separate refund application. You do not need FTA pre-approval, but you must keep evidence.

Step by step process

1. Confirm the original invoice was reported and output VAT paid.
2. Check the contract for the payment due date and count six months.
3. Write the debt off in your ledger. A general bad debt provision is not enough. The specific invoice must be derecognised.
4. Send a written notice to the customer. Include the invoice number, date, amount, VAT amount, and a clear statement that the amount has been written off as a bad debt.
5. Reduce output VAT in your next VAT return by the VAT element only, not the full invoice value.
6. File the return within 28 days of the tax period end.

Evidence to keep

FTA audits focus on documentation. Keep the original tax invoice, contract or purchase order, statements of account, dunning letters, the bad debt write off journal, and proof that the customer notice was sent. Email with a delivery receipt is acceptable. Records must be kept for at least five years.

The customer side: input tax reversal

UAE VAT law also makes the customer act. If a VAT registered buyer claims input tax on a supplier invoice and does not pay within six months of the agreed payment date, the buyer must reverse that input tax in the next VAT return.

Once the buyer pays the supplier, they can re-claim the input tax in the period of payment. This rule applies whether or not the supplier ever claims bad debt relief. Many finance teams miss this and leave themselves exposed on audit.

Worked example for the customer

A trading company receives an invoice of AED 105,000 on 1 March, including AED 5,000 of VAT. Payment is due in 30 days. They claim AED 5,000 input tax in their Q1 return. By 1 October, the invoice is still unpaid. In the Q4 return, the company must reverse AED 5,000 of input tax. When they pay in January, they reclaim AED 5,000 in the Q1 return of the next year.

Partial payments and credit notes

Sometimes you collect part of the amount due. Relief is only available for the unpaid VAT element. If you receive 60% of an invoice and write off the remaining 40%, you can claim relief on 40% of the original VAT.

A bad debt write off is different from a credit note. Issue a credit note when you agree to cancel or reduce the original supply, for example after a price dispute. Use bad debt relief when the supply stands but the customer will not pay.

Recoveries after write off

If the customer pays later, even years later, you must add the VAT element back as output tax in the period you receive the money. The relief is reversed in proportion to the recovery. Keep a separate ledger of written off invoices so recoveries are not missed.

VAT on bad debts and corporate tax

Bad debt write offs also affect corporate tax under Federal Decree-Law 47 of 2022. The standard corporate tax rate is 0% on taxable income up to AED 375,000 and 9% above. A specific bad debt provision is generally deductible if recognised under accounting standards and supported by evidence. VAT bad debt relief is a separate, mechanical adjustment in the VAT return and does not change the corporate tax position of the receivable itself.

Common mistakes to avoid

• Starting the six month clock from the invoice date when the contract has a later due date.
• Claiming relief on the full invoice value instead of the VAT portion only.
• Using a general bad debt provision rather than writing off the specific invoice.
• Forgetting the written notice to the customer.
• Missing the input tax reversal on the customer side, leading to penalties on audit.
• Treating disputed invoices as bad debts. A genuine dispute usually needs a credit note, not relief.

Penalties for getting it wrong

Incorrect VAT returns can trigger administrative penalties under the tax procedures law. These range from fixed amounts to percentage based fines on the under-declared tax. The best defence is contemporaneous documentation and a clear internal policy for write offs and customer notifications.

How bad debts fit with other VAT edge cases

Bad debt relief is one of several mechanisms that keep VAT neutral. Others include refunds for specific groups and rules for businesses leaving the system. If you are closing or restructuring, review VAT Deregistration UAE and the related VAT Deregistration Fees UAE, along with the VAT Clearance Certificate UAE process.

For repayment claims, see our guides on VAT Refund UAE Business, VAT Refund UAE Tourists, and VAT Refund UAE New Residential Properties. All of these sit within the wider UAE VAT framework. For the official rules, refer to the UAE Federal Tax Authority and the UAE Ministry of Finance.

Quick checklist before you claim

• Is the supply taxable and was output VAT paid?
• Has six months passed from the payment due date?
• Is the specific invoice written off in your ledger?
• Have you sent a written notice to the customer?
• Are you reducing only the VAT element in the return?
• Have you logged the invoice for future recovery tracking?

If every box is ticked, claim the relief in your next VAT return. If not, fix the missing item first, then claim in the period the last condition is met.

EInvoice Direct helps UAE finance teams keep clean tax invoice records, payment due dates, and customer notifications in one place, which makes bad debt relief defensible on audit. To see pricing and how the platform handles your VAT records, get UAE e-invoicing pricing.