Saudi VAT Bad Debts: Relief and Unpaid Purchase Tax

An unpaid invoice can affect the supplier’s output VAT and the customer’s input VAT under different rules. Supplier bad-debt relief requires a qualifying file under Article 40(7). A customer’s adjustment under Article 40(10) does not wait for the supplier to claim that relief. Treating both sides as one automatic reversal can produce the wrong amount or reporting period.

Separate non-payment from a cancelled or reduced supply

An overdue balance, an accounting impairment, an agreed price reduction and cancellation of a supply are different events. Determine what actually happened before issuing documents or changing a return. Non-payment alone does not mean that goods were returned or services never supplied.

Article 40(7)–(9) addresses the supplier’s conditional bad-debt adjustment and later collections. Paragraphs (10)–(11) separately address the customer’s unpaid-input adjustment and later payments. Paragraph (12) preserves the applicable statutory time limits.

The credit and debit note guide explains genuine price/supply changes and their documentation. A supplier should not invent a commercial cancellation merely to move an unpaid invoice into a more convenient VAT workflow.

Supplier relief requires the prior tax and all eligibility conditions

Article 40(7) permits a reduction for VAT attributable to unpaid consideration only when all its conditions are met. The supplier must have previously included the relevant output tax in its return and paid the tax due. There is no relief for VAT that was never correctly brought into account on that basis.

The supply must be to an unrelated person. Check the actual Article 37 relationship facts rather than assuming that every trade debtor is independent because it has a separate company registration. Accounting consolidation, ownership and other statutory connections need their own review.

At least twelve months must have elapsed from the date of the taxable supply. This is not simply twelve months from the invoice due date, the first collection reminder or the accounting write-off. Establish the actual tax point, previous return and payment before relying on an ageing report.

These conditions operate together with the documentary conditions below. Passing the twelve-month point does not automatically create a reduction in that anniversary’s return if the other conditions are not yet met.

Prove the write-off and address the legal-recovery condition

Paragraph (7)(d) requires the stated certificate from a licensed, certified accountant in the Kingdom confirming that the debt has been written off from the commercial books. Where the person is not legally required to appoint an auditor, ZATCA may accept other supporting documentation. That discretion is not an automatic exemption from supporting the actual write-off.

A provision for expected credit losses or a management statement that collection is unlikely should not be substituted for the required evidence. Reconcile the actual customer balance, write-off entry, accountant’s certificate and VAT previously declared.

For amounts unpaid by the customer exceeding SAR 100,000, paragraph (7)(e) addresses unsuccessful formal legal recovery and evidence such as a judicial ruling, debtor bankruptcy or a court order initiating a formal recovery procedure. ZATCA’s Retail Sector guideline, issue 3 May 2026, section 6.2, expressly includes that condition. Keep the customer’s total unpaid amounts and the actual proceedings under review; splitting one customer’s debt into small invoices does not establish that the condition disappears.

The Professional Services guideline, third version May 2026, section 7.3, also explains certification and legal-action evidence. Its shorter summary should not be used to omit the current Arabic unrelated-party condition. Apply the full provision to the actual recovery file and obtain clarification where the legal evidence does not establish the required position.

Cash accounting and later collections have separate consequences

Article 40(8) excludes the paragraph (7) adjustment for a person using Article 46 cash accounting. That method already links the relevant output to payment. An overdue invoice cannot support a second reduction of tax that was not recognised as unpaid output under the method.

Under paragraph (9), a supplier that has obtained the bad-debt reduction and later receives all or part of the consideration brings the VAT on that received amount back into the receipt-period return. The paragraph also requires a new tax invoice reflecting that amount. Preserve the original supply, relief calculation and recovery record so the later collection is not taxed twice or omitted.

The Retail Sector guideline, section 6.2, Example 14, illustrates relief followed by a half collection. Its printed April 2020 sale date and stated 15% rate should not be copied as an accurate historical-rate combination: the official ZATCA rate-increase guideline, sections 1 and 2.1–2.2 identifies the increase to 15% from 1 July 2020. At the example’s assumed 15%, SAR 14,300 contains SAR 1,865.22 VAT and its SAR 7,150 half payment contains SAR 932.61, rounded to two decimals, rather than the displayed SAR 1,865.21 and SAR 932.60. Those calculations do not validate its historical rate. Retain the principle while checking the actual period and arithmetic.

Dariba illustration — original current-rate assumptions: an invoice-basis supplier has an unpaid SAR 46,000 VAT-inclusive balance from an ordinary 15% supply. All relief conditions are met and the relevant VAT was previously declared and paid. The VAT component eligible for the assumed reduction is SAR 6,000. A later SAR 11,500 collection contains SAR 1,500 VAT, brought back into account under paragraph (9). These are Dariba’s figures, not a redating or silent repair of Example 14.

The customer must review unpaid inputs independently

Article 40(10) concerns a taxable customer that deducted input VAT on a received supply but has not paid the full consideration after the stated twelve-month period from the month following the supply month. It requires adjustment of the deducted VAT attributable to the amount remaining unpaid, in the return for the period in which that twelve-month period ends, subject to the specific exception.

This clock differs from the supplier’s twelve months from the supply date. Do not simply reuse the supplier’s relief date or the invoice due date. Identify the supply month, following month, end of the statutory period and relevant tax return.

ZATCA’s Input Tax Deduction guideline, third version May 2026, section 10.2, states that extended payment terms can still be caught and that the customer’s adjustment is not linked to the supplier’s eligibility for bad-debt relief. A supplier’s decision to keep pursuing the debt does not, by itself, preserve the customer’s earlier deduction.

The amount needs reconciliation with what was actually deducted and the payment position. Do not reverse VAT that was never claimed or assume an invoice’s entire VAT is unpaid after a supported partial settlement. Restrictions, attribution and any separate credit-note adjustment remain relevant.

The goods-financing exception has cumulative conditions

The paragraph (10) exception concerns supplies of goods under financing contracts, including finance leasing, murabaha and lease-to-own, received from a taxable person licensed for the relevant activity and paid through periodic instalments. It is not a general exception for every unpaid purchase, ordinary operating lease or long credit term.

The contract or agreement must remain effective; there must be no relevant judicial dispute over the supply contract/agreement; the supplier must have declared the full VAT due on the supply in the relevant return; and the customer must hold the supplier’s written certificate to that effect. Retain the licence, goods/contract, payment schedule, continuing-status evidence and certificate together.

The Financial Services guideline, second edition May 2026, section 8.5.1, and Input Tax Deduction section 10.2 describe this framework. A five-year term or the word finance alone does not establish all conditions. In particular, do not replace the supplier’s full-declaration requirement with an assumption that every instalment contains separately chargeable VAT on the same goods again.

Read the general dispute example against the controlling provision

The Input Tax Deduction guideline’s section 10.2 gives an unnumbered building-materials example saying that input credit is not revoked while a quality dispute remains unresolved. Current Arabic Article 40(10) does not state a general unresolved-dispute exception. Its identified financing exception instead includes the absence of a relevant judicial dispute as one of its conditions.

The short example should therefore not be presented as a universal safe harbour allowing every disputed invoice to retain input VAT indefinitely. Establish whether there is an actual cancellation, accepted price change, qualifying financing arrangement, another applicable statutory basis or a transaction-specific clarification. Unless that basis is established, apply the controlling non-payment rule rather than relying solely on the example’s broader sentence.

This distinction also protects the supplier analysis. A customer’s complaint is not proof that every supplier bad-debt condition has been met, and a customer’s statutory input adjustment is not an instruction that the supplier must cancel its original sale.

Later payment permits a proportionate input reinstatement

Article 40(11) permits an increase after a paragraph (10) adjustment when the customer later pays consideration. The increase reflects the VAT on the amount paid and may be included in the payment-period return or a subsequent period, subject to the applicable time limits. Payment does not cure another restriction or create a second claim for input already retained.

The Input Tax Deduction guideline’s section 10.2 gives an example describing SAR 50,000 as including SAR 7,500 VAT and a SAR 25,000 half payment as including SAR 3,750. At 15%, those VAT amounts fit net amounts of SAR 50,000 and SAR 25,000, rather than the printed VAT-inclusive descriptions. Do not copy both the labels and the figures into a return calculation.

Dariba illustration — original assumptions: a wholly deductible ordinary purchase is SAR 50,000 net plus SAR 7,500 VAT, giving SAR 57,500 inclusive. Assume all SAR 7,500 was validly claimed and then reversed under paragraph (10). A later supported payment of SAR 28,750, half the gross price, contains SAR 3,750 VAT. That is the assumed reinstatement; the remaining SAR 3,750 stays unclaimed until the relevant conditions are met. This is a separate consistent calculation, not the official example’s stated gross amount.

Reconcile the debt, tax history and each return period

Maintain one schedule showing supply date/month, net and gross price, original VAT, prior declaration/payment or deduction, debtor relationship, receipts/payments, write-off evidence, recovery proceedings, any financing exception, adjustment period and later reinstatement. Identify the actual amount of tax affected rather than treating the whole accounting debt as VAT.

Article 40(12) keeps statutory time limits in force. The right to make a later adjustment is not an unlimited correction or refund period. A genuine current event and a mistake in an earlier return can also require different procedures; see return corrections.

Dariba recommends reconciling supplier relief and customer input reviews separately, while matching each to the actual invoices and cash. This makes the different legal clocks visible and avoids duplicate relief, an unsupported dispute exception or an input claim that has already been reinstated.