When to write off bad debts in the UAE: the accounting and the VAT relief

Accounting distinguishes two steps. A provision (or expected credit loss allowance under IFRS 9) recognises that some receivables probably will not be collected, while you keep chasing. A write-off removes a specific debt from the books once you have concluded it is irrecoverable.

Our view: most SMEs should review the AR ageing every quarter, provision specific debts over 120 days where recovery is doubtful, and write off only when there is clear evidence: the customer has ceased trading, legal advice says pursuit is not worth it, or a settlement has been agreed for less.

Provision for a doubtful AED 21,000 invoice (AED 20,000 plus AED 1,000 VAT): debit bad debt expense AED 20,000; credit allowance for doubtful debts AED 20,000. The VAT element stays in receivables until relief applies.

Write-off, once conditions are met: debit allowance for doubtful debts AED 20,000; debit VAT output (bad debt relief adjustment) AED 1,000; credit accounts receivable AED 21,000. If the customer later pays, reverse the relief and record the receipt.

Article 64 of the VAT Decree-Law lets a supplier reduce output tax on a bad debt. The FTA’s public clarification VATP024 sets out the conditions: VAT was charged and accounted for on the supply; the consideration has been written off in full or in part in the accounts; more than six months have passed since the date of supply; and the customer has been notified of the amount written off.

The notice should include, at minimum, the invoice number and date and the amount written off, and can be sent by letter or email. The customer does not have to acknowledge it, but you must keep evidence that you sent it. Relief is limited to the VAT on the amount actually written off. If the customer pays later, you must account for the VAT again.

• VAT on the supply was accounted for and paid
• Debt written off in your books, fully or in part
• More than six months since the date of supply
• Customer notified with invoice number, date and amount

A Ras Al Khaimah contractor invoiced AED 105,000 including VAT of AED 5,000 on 10 January. The customer stopped responding in March and its office closed in May. On 15 August, more than six months after supply, the contractor writes off the full amount, emails the notice to the customer’s last known address and the owner, and adjusts output VAT by AED 5,000 in the return for that quarter.

For corporate tax, the write-off reduces accounting profit, which is the starting point for taxable income under Article 20 of the Corporate Tax Law. Whether any adjustment is needed depends on the facts, so ask your tax agent before filing.

The AR ageing shows every invoice over 180 days from its date of supply. Ask the AI agent “which invoices over six months old have had no payment and no customer contact since June?” and it lists candidates for review. When you decide to write one off, it drafts the journal, splits the net amount and the VAT, and prepares a notification letter with the invoice details for you to send.

You approve the write-off, send the notice, and attach the proof of sending to the journal, so the evidence sits with the entry if the FTA asks. The VAT adjustment then appears in the VAT 201 draft for your review before you file on EmaraTax.