What it means
A VAT-registered seller may invoice a customer and account for output VAT even though the customer has not yet paid. If the debt later becomes bad, the seller may be able to reduce output tax under the law, although the accounting write-off and the VAT adjustment are related but distinct decisions.
The UAE Federal Tax Authority's published VAT law sets the core conditions in Article 64: the goods or services must have been supplied and the due tax charged and paid. The consideration must be written off in full or part as bad debt in the supplier's accounts, and more than six months must have passed since the supply.
The supplier must also notify the recipient of the amount of consideration written off, and keep proof of the notification and the underlying invoice, tax return, ledger entry and collection history. Merely marking an invoice 'overdue' does not satisfy the write-off and notice conditions.
Count the six months from the date of supply specified in the law, not simply from the payment due date, since a company may send reminders long before relief becomes available. Check the exact supply date and whether separate supplies or instalments have different timing, and do not apply a single date to a mixed invoice without analysis.
The UAE rule permits a reduction of output tax equal to the tax related to the consideration written off. If only part is unpaid and written off, calculate tax only on that eligible part.
Review whether the debt amount is VAT-inclusive and whether the original supply was subject to the standard rate or another treatment. For a simple standard-rated UAE supply, a VAT-inclusive unpaid amount of AED 210,000 includes AED 10,000 of VAT at 5%, which is recovered by dividing by 105 and multiplying by 5.
This example assumes the whole amount is eligible and no adjustments or mixed-rate items apply, and the formula must never be used on an amount excluding VAT. The customer has a corresponding obligation in certain circumstances, because Article 64 says a registered recipient that deducted input tax must reduce recoverable input tax when the supplier has reduced output tax and notified it, and the other stated conditions are met.
Supplier and customer should both keep records. A supplier's relief is not a silent windfall, and the tax should be revisited if a later payment arrives, since the relief concerns the tax on the eligible consideration written off while the unpaid commercial debt remains a separate matter.
In practice
Real-world examples.
Example
A UAE supplier writes off a fully unpaid standard-rated invoice after the statutory period, sends the required notice and checks the tax paid before adjusting its return. The invoice was for AED 105,000 including AED 5,000 of VAT. The adjustment reduces output tax by AED 5,000.
Example
A customer pays half an invoice. Finance calculates the VAT associated only with the eligible unpaid and written-off half, rather than the whole invoice. For an unpaid AED 52,500 the VAT component is AED 2,500, and the file records the part payment and the write-off.
Example
A buyer that had deducted input VAT receives the supplier's write-off notice and checks its corresponding input-tax adjustment under Article 64. Its accountant reduces recoverable input tax by the amount shown and keeps the notice. The buyer's own payment obligation to the supplier is dealt with separately.
Formula
Calculation
For an eligible standard-rated UAE debt stated inclusive of 5% VAT: VAT component = eligible VAT-inclusive unpaid consideration x 5 / 105
Worked example 1: AED 210,000 x 5 / 105 = AED 10,000. Check: the VAT-exclusive value is AED 200,000, and 5% of AED 200,000 is AED 10,000, so AED 200,000 + AED 10,000 = AED 210,000.
Worked example 2 (partial write-off): an invoice of AED 105,000 including VAT is half paid, and the unpaid AED 52,500 is written off. VAT component = AED 52,500 x 5 / 105 = AED 2,500.
Confirm the original VAT treatment, partial payments, write-off and statutory conditions before using the result.Case study
Seen in the real world.
This illustrative and entirely fictional case follows Crescent Office Supply, an invented UAE seller. It had accounted for AED 10,000 output VAT on a standard-rated AED 210,000 invoice but received nothing. After more than six months from supply, it exhausted reasonable collection steps, approved a full accounting write-off and notified the customer of the amount. Its tax reviewer checked the original return, invoice and notice, then calculated AED 10,000 as the VAT component potentially adjustable under Article 64. The team logged the claim and watched for later payment.
The case assumes every legal condition is met and does not decide a real tax filing. Crescent also changed its credit routine. It now sets a reminder at five months after supply to review each large unpaid invoice, so that collection steps, a write-off decision and the customer notice are completed in good time. Finance keeps a checklist for each case showing the date of supply, the tax return period and the evidence collected.
Watch out
Common mistakes.
- Claiming relief merely because an invoice is late, without the write-off, elapsed period, tax-paid and customer-notice checks.
- Applying 5 / 105 to a VAT-exclusive amount or to the entire invoice when only part remains unpaid and eligible.
- Treating the VAT adjustment as forgiveness of the customer's debt or failing to revisit the tax when a later payment arrives.
Questions
People also ask.
What is bad debt relief?
It can reduce output VAT previously paid on an eligible unpaid and written-off supply. The UAE supplier must satisfy each condition in Article 64.
How long must you wait in the UAE?
More than six months must have passed from the date of supply, along with the other legal conditions. The due date alone does not determine eligibility.
What if the customer pays later?
No. The relief concerns VAT related to the eligible consideration written off. The unpaid commercial debt is a separate matter.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related