Clients Not Paying? How to Reclaim VAT on Bad Debts (Article 64)
When a customer doesn’t pay their invoice, you’re left out-of-pocket twice: once on the revenue, and again on the VAT you already paid to the FTA. The bad debt relief scheme fixes this.
In the UAE, VAT is accounted for on an accrual basis. This means you must declare and pay output VAT to the Federal Tax Authority in the same tax period your invoice is issued, regardless of whether the customer has actually paid you. If that customer then goes bankrupt, disappears, or simply refuses to pay, the VAT you remitted becomes a direct cost to your business.
Article 64 of Federal Decree-Law No. 8 of 2017 on Value Added Tax exists specifically to prevent this outcome. It allows VAT-registered suppliers to adjust (reduce) their output VAT liability on unpaid invoices, but only if you meet four strict, mandatory conditions.
This guide walks you through exactly what those conditions are, how the FTA Public Clarification VATP024 interprets them, and how to claim relief without triggering an audit.
How to Reclaim VAT?
Yes, you can reclaim VAT on unpaid invoices under Article 64 of the UAE VAT law. But the FTA sets four mandatory conditions: (1) you must have charged and accounted for the VAT, (2) written off the debt in your books, (3) waited more than six months from the invoice date, and (4) notified the customer in writing. Meeting all four is non-negotiable. Partial claims are permitted only to the extent of the amount written off.
What Is Bad Debt Relief and Why the FTA Created This Rule
Bad debt relief is a mechanism that prevents VAT from becoming an unintended cost to suppliers when customers fail to pay. In the UAE, VAT is assessed on the date the invoice is issued, not when cash is received. This accrual-basis system works well most of the time, but it creates a problem when payment never arrives.
Consider a practical scenario: You supply AED 100,000 worth of goods to a company and issue an invoice on 1 January. You charge 5% VAT (AED 5,000), bringing the total invoice to AED 105,000. In your January VAT return, you account for that AED 5,000 as output tax and remit it to the FTA. The invoice is due on 28 February. But the customer never pays and, by August, declares bankruptcy.
You have now lost AED 100,000 in revenue and are out-of-pocket for the AED 5,000 in VAT you paid to the government. The customer, meanwhile, claimed input VAT on their end (if they were VAT registered), creating an imbalance in the system.
Article 64 exists to correct this imbalance. It allows you, the supplier, to adjust your VAT liability downward to recover the VAT you paid on the amount that was never collected. The FTA sees this not as a loophole but as fairness: you should not bear the burden of tax paid on money you never received.
The Four Mandatory Conditions You Must Meet
The FTA is not permissive on Article 64 claims. The Public Clarification VATP024 (issued March 2021) makes clear that all four conditions must be satisfied. There are no exceptions, no partial credit, and no shortcuts.
Condition 1: VAT Must Have Been Charged and Accounted For
This is straightforward on its face but frequently misunderstood in practice. You must have:
Charged VAT on the tax invoice at the time of supply (the correct rate applicable to that supply)
Accounted for that VAT to the FTA via your VAT return (i.e., declared it as output tax in the same tax period the invoice was issued)
If you issued an invoice without VAT because you thought it was exempt (but it wasn’t), or if you never filed a VAT return that included the invoice, you cannot claim relief. The FTA will not entertain a late claim for VAT you did not originally account for. The time to get the VAT right is when you issue the invoice and file the return, not years later when the customer doesn’t pay.
Condition 2: Consideration Must Be Written Off in Full or Part
The second condition is that you must have written off the debt (wholly or partially) in your accounting records as a bad debt. This serves two purposes: it ensures that your accounts reflect the true financial position of the business, and it creates a documentary trail for the FTA.
Write-offs must be evidenced in your general ledger. Many SMEs do not formally write off bad debts; they simply stop pursuing collection. This is insufficient. You must make an explicit accounting entry (typically via a debit to a bad debt expense account and a credit to accounts receivable) that removes the invoice from your receivables and records it as a loss. Without this entry, you do not have the supporting documentation the FTA requires.
If only part of an invoice is written off (e.g., the customer pays half but defaults on the other half), you can claim VAT relief only on the portion written off. The VAT adjustment must correspond proportionally to the amount written off. If AED 60,000 of an AED 100,000 invoice is written off, you can adjust the VAT on AED 60,000 only.
Condition 3: More Than Six Months Must Have Passed from Date of Supply
The third condition imposes a waiting period. You cannot claim bad debt relief until more than six months have passed from the date the invoice was issued (the date of supply). The FTA’s rationale, stated in VATP024, is clear: during those six months, the supplier should be actively engaging with the customer to recover the outstanding amount.
This is not a nominal condition. If you issue an invoice on 1 January, you cannot claim relief before 2 July (more than six months later). If you attempt to claim in your Q2 return (April-June), it will be rejected. The six-month window is measured from the invoice date, not from when you decided to stop chasing payment.
For invoices issued in the final months of a financial year (e.g., November or December), the six-month requirement means the relief claim will fall into the following year’s VAT returns. Plan accordingly.
Condition 4: The Customer Must Be Notified in Writing
The fourth condition is that you must notify the customer in writing that you have written off their debt. This notification must include:
The tax invoice number and date.
The amount of consideration (the invoice amount, excluding VAT) that has been written off
A clear statement that the amount is being written off as a bad debt.
The notification can be sent via letter, email, post, or any similar communication. Importantly, you do not need the customer’s acknowledgment or agreement. The FTA just requires proof you sent it. Retain a copy of the email, letter or post receipt as proof of notification. If you cannot produce evidence of the notification when (or if) the FTA audits your claim, the relief will be denied.
How to Report Bad Debt Relief on Your VAT Return
Once you meet all four conditions, the actual claim is made on your VAT return in the period in which you write off the debt. The mechanism is straightforward but easy to misplace if you are not careful.
The adjustment for bad debt relief must be entered in the ‘Adjustment column’ of Box 1 of your VAT return. Box 1 is the output tax box. The adjustment reduces your output tax liability in that return period. The amount you enter is the VAT amount only, not the full invoice value.
If your business operates across multiple emirates (e.g., your registered office is in Dubai, but you have a branch in Abu Dhabi), the adjustment must be reported separately for each emirate in accordance with the original output tax amount being adjusted.
Common Errors That Trigger FTA Scrutiny
Bad debt relief sounds simple in theory, but the FTA audits it carefully. These are the mistakes that most commonly lead to queries or rejections:
Claiming relief before six months have passed: The six-month rule is absolute. If you file an adjustment in the VAT period in which the debt is written off, but only five months have passed, the FTA will reject it.
No written proof of customer notification: Email is acceptable, but a screen shot is better. A printed email with headers is ideal. If you cannot produce this when asked, the claim fails.
Adjusting the full invoice amount instead of just the VAT: The adjustment is on VAT only. If you write off a AED 100,000 invoice (including AED 5,000 VAT), you adjust for AED 5,000, not AED 100,000.
No bad debt entry in the accounting records: If your accounts do not show a write-off, the FTA will ask where it came from. You must be able to trace the adjustment back to a specific entry in your general ledger.
Claiming on VAT-exempt supplies: If the original supply was VAT-exempt (e.g., financial services, education), there is no VAT to recover. Relief only applies to taxable supplies.
Documentation You Must Keep for Five Years
The FTA has a five-year lookback window for VAT assessments. All documentation supporting your bad debt relief claim must be retained for the full five-year retention period from the date of the VAT return adjustment. This includes:
- The original tax invoice and payment terms
- Bank statements showing non-payment or partial payment
- Correspondence with the customer (emails, dunning letters, payment reminders)
- The bad debt write-off entry in your general ledger
- The written notification to the customer about the write-off
- Proof of posting (email headers, delivery receipts, etc.)
- Evidence of any legal action or insolvency proceedings against the customer
How PROFITZ ADVISORY can Help
Bad debt relief sounds straightforward until you are facing an audit or have misplaced documentation. The FTA’s interpretation of Article 64 is strict, and the conditions are non-negotiable. Mistakes cost time, penalties, and sometimes additional tax exposure.
PROFITZ ADVISORY is a UAE-based accounting and VAT advisory firm working with business owners, finance teams, and accountants across all seven emirates. We specialize in VAT compliance, dispute resolution, and relief claims, including bad debt relief. What we do for clients:
- Review your bad debts ledger and identify which invoices meet the Article 64 conditions
- Verify the six-month waiting period for each debt
- Prepare or locate customer notification documentation
- Calculate the correct VAT adjustment amount
- File the adjustment on your VAT return with full supporting documentation
- Provide FTA correspondence support in the event of a query or audit
Whether you have a single invoice or a growing bad debts register, we bring clarity and confidence to your relief claim. We handle the VAT compliance so you can focus on managing your receivables.
Other Related Services
- Accounting & Bookkeeping Services in the UAE
- Corporate Tax Services in the UAE
- VAT Services in the UAE
- E-Invoicing Services in the UAE
- Payroll Services in the UAE
- Audit & Assurance Services
- Compliance & Certification Services
- Company Formation & Consultancy
Ready to claim your bad debt relief?
Contact PROFITZ ADVISORY for a free VAT relief assessment. We will review your bad debts register, confirm your eligibility, and guide your claim from start to finish. No complexity, no guesswork.
Frequently Asked Questions
1. Can I claim bad debt relief on invoices issued to unregistered customers?
Yes. The relief applies to unpaid invoices whether the customer is VAT-registered or not. The underlying supply must be taxable (charged at 5%), but the customer’s VAT registration status is irrelevant.
2. What if the customer eventually pays months or years later?
If the customer pays after you have claimed bad debt relief, you must reverse the adjustment. Report the reversal as an adjustment in the VAT return period in which payment is received. This is a separate transaction, not a correction of the original claim.
3. Does bad debt relief apply to credit notes?
No. Bad debt relief is for unpaid invoices. If you have issued a credit note to a customer, that is a separate transaction. Adjustments to invoices are handled through credit notes, not through bad debt relief.
4. Can I claim relief on invoices that are in dispute?
The FTA does not prohibit this, but it is risky. If the customer disputes the invoice and you later win the dispute but have already claimed relief, you will need to reverse the adjustment. Document your position clearly: only write off invoices that you genuinely believe are uncollectible, not invoices in good-faith dispute.
5. Are there penalties if I claim relief incorrectly?
Yes. If the FTA finds that you claimed relief without meeting all four conditions, they will disallow the claim, reassess your VAT liability, and levy penalties. This is why documentation and compliance with the conditions is essential.
6. Do I need to declare individual bad debts or can I claim on a schedule?
You can claim on a schedule (a supporting document), but the individual amounts must be identifiable, the conditions must be met for each invoice, and the schedule must be submitted with or shortly after your VAT return. The adjustment itself is entered in Box 1 of the return; the schedule is supporting documentation.
