For corporate taxpayers in Saudi Arabia, bad debts can significantly impact cash flow and profitability. Fortunately, under the Saudi VAT Implementing Regulations, businesses may recover Input VAT paid on supplies where payment is not received—provided strict conditions and timelines set by the Zakat, Tax and Customs Authority (ZATCA) are met. This article outlines the eligibility rules, recovery process, and compliance tips.
📌 What is Input VAT Recovery on Bad Debts?
Input VAT recovery on bad debts allows a VAT-registered business to reclaim VAT paid to suppliers (or not remit output VAT to ZATCA) when the customer has defaulted on payment after a reasonable collection period.
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✅ ZATCA’s Conditions for Recovery
The VAT Implementing Regulations (Article 40) lay out specific conditions for claiming input VAT on bad debts:
- The supply was made to another VAT-registered or unregistered person in Saudi Arabia.
- VAT on the supply was correctly accounted for and paid to ZATCA.
- Full or partial payment for the supply has not been received after 12 months from the due date.
- The supplier has taken reasonable steps to recover the debt (e.g., reminders, legal notices).
- The debt is formally written off in the business’s accounting records as irrecoverable.
📅 Timelines for Claiming Bad Debt VAT Recovery
Corporate taxpayers must adhere to strict timelines when claiming recovery:
- Wait for a 12-month period after the original due date of the invoice.
- Include the adjustment in the VAT return for the period in which the debt is written off.
- Keep all supporting documentation for at least six years for ZATCA audit purposes.
📝 Documentation Required
To substantiate a bad debt VAT recovery claim, maintain:
- Original tax invoice issued for the supply.
- Proof of payment of VAT to ZATCA.
- Records of collection attempts (emails, letters, legal notices).
- Accounting entries showing the write-off of the debt.
⚠️ Common Mistakes to Avoid
- Claiming recovery before the 12-month waiting period is over.
- Failing to demonstrate adequate recovery efforts.
- Not adjusting the VAT return in the correct reporting period.
- Lack of proper supporting documents for audit verification.
💡 Best Practices for Compliance
- Implement a robust credit control process to minimize bad debts.
- Track unpaid invoices systematically to trigger VAT recovery actions on time.
- Maintain detailed records to satisfy ZATCA’s audit requirements.
- Work closely with tax advisors to ensure correct recovery calculations.
🏁 Conclusion
For Saudi corporate taxpayers, input VAT recovery on bad debts is a valuable relief mechanism, but only if all conditions and timelines are strictly followed. Proper documentation, timely action, and compliance with ZATCA’s requirements will ensure your business benefits from this provision without triggering penalties.
