Introduction to Bad Debt Relief and Bad Debt Recovery

AR-Bad Debt Relief

The process of claiming back the output tax on bad debts is called AR-Bad Debt Relief. Bad Debt Relief arises when a customer defaults the payment (in full or part) to supplier, who has accounted for VAT. Based on specific criteria/condition (differ from country to country), tax authorities allow companies to claim back the already paid output tax on bad debts. Example: In Malaysia, a company is entitled to a relief for bad debt on the whole or part of the tax paid for a taxable supply of goods and services if:

• No payment is received for the taxable supply from the debtor for 6 months from the date of supply;
• The debtor becomes insolvent before the period of six months has elapsed; and
• Sufficient efforts are made to recover the debt

AP-Bad Debt Relief

In Accounts Payable, when you fail to pay to supplier, you can redeem the amount of the relevant input tax that you have initially credited or refunded. The relevant tax amount must be paid back to the tax authorities. This Bad Debt Relief arises when a company defaults the payment (in full or part) to a supplier for any supply of goods or services at the end of a specific period. In this scenario, the company must reverse the Input Tax related to the defaulted payment, as Output Tax.

Bad Debt Recovery

If for a claimed bad debt relief, a company receives payment of a part of the debt, an adjustment for the bad debt relief already claimed, must be made.

If for a bad debt relief paid, a company pays the supplier for goods or services, an adjustment for the bad debt relief already paid, must be made by reducing the VAT on purchases, for the period in which the payment is received.