Bad debt relief: 5 VAT conditions
The previous lesson covered money arriving before the sale. This one is its mirror image: the invoice went out, you declared and paid its VAT, and the customer never paid. The goods left your warehouse and the tax left your account, but the debt is still paper in a drawer. Does VAT on money you never collected stay on you forever?
What the regulation says
Under Article 40(7) of the VAT Implementing Regulations published by the Zakat, Tax and Customs Authority, a taxable person who has not received all or part of the consideration for a taxable supply may reduce output tax by the tax calculated on the unpaid consideration, in a return meeting the stated conditions. The table simplifies them; the authority's published text governs.
| Condition | What proves it on your side |
|---|---|
| You accounted for the tax as output tax and paid what was due | The return showing the invoice, plus the payment record |
| The supply was made to a non-related person | The customer file and its relationship to your business |
| At least twelve months have passed from the date of the taxable supply | The supply date on the invoice, not your last chase |
| A certificate from a certified accountant licensed and approved in the Kingdom showing the debt was written off from the commercial books | The certificate; other supporting documents may be accepted from a person not required to appoint an auditor |
| For unpaid amounts above one hundred thousand riyals where formal legal action was taken without result | A court judgment, the debtor's bankruptcy, or a court order starting a formal proceeding |
The same article states that a person on the cash accounting basis does not make this adjustment at all, since their tax only became due on collection.
The working rule: writing a debt off in your books is one thing, reducing the tax is another. The second needs a specific date and a document that survives an audit.
A concrete example: a stuck debt that starts on WhatsApp
A contractor tired of chasing an old customer writes to the system:
140,000 invoice on a customer from last July, over a year now and not a riyal paid, I want to write it off
The system does not write anything off on a message. It answers with what is missing:
That supply date is over twelve months old, so that point is met. Three things remain: confirmation the customer is not a related person, a certified accountant's certificate that the debt was written off from the books, and — since the amount exceeds one hundred thousand — evidence you started formal legal action. Send them and I will prepare the adjustment in this period's return; until then the invoice stays in the ageing report.
That is the practical difference with accounting run from a phone: an old invoice does not become a tax adjustment with one tap, it waits for its document. See also chasing receivables — most debts that reach write-off were weak follow-up a year earlier.
What if the customer pays after the adjustment
If the adjustment was made and the taxable person later receives all or part of the consideration, the tax on the amount received becomes due in the return for the period the payment was made, with a new tax invoice for that amount. The reduction is not permanent; it follows the cash.
The other direction: a purchase invoice you never paid
The rule cuts both ways. A person who deducted input tax on a supply received and has not paid it in full after twelve months from the month following the month of supply must adjust the deductible input tax by the tax on whatever remains unpaid, in the return for the period those twelve months ended, subject to the exceptions the article sets out for certain financing contracts. See input VAT deduction first.
Checklist
- Make the ageing report show one decisive column: time since the supply date, not the last reminder.
- Raise an alert at ten months, so legal steps start before the window closes.
- Separate a doubtful-debt provision from a certified write-off; they do not carry the same tax effect.
- Keep a file per written-off debt: invoice, the return that paid its tax, the certificate, and the legal document where required.
- Alert on late payment of an old debt so the tax returns that period with a new invoice.