In late 2022, the UAE introduced new rules on Corporate Tax. Businesses will be charged at 9 per cent on profits over Dh375,000 from June 1, 2023. The rules are wide-ranging, and more clarifications and announcements are expected. But one of the takeaways from the new law is for SMEs is to think twice about writing off bad debt.
Bad debt is when your receivables are either overdue or un-claimable. This could be a result of legal disputes, your customer going through liquidation or even absconding. Ultimately, it would be governed by your company policies. The most common practice is to strike a line through the receivable and concede this is another business lesson and forget about it.
But, keep in mind that it is IFRS 9 (International Financial Reporting Standards) that governs the accounting policies of when to write-off bad debt. Broadly speaking, SMEs are loathe to write-off bad debt and below are some of the reasons why they would be reluctant.
The overall profits will be impacted for the company, which is never a good thing. This has a knock-on effect on financial stability and its confidence to take on more business from a particular customer group or industry.
Finances can look distorted and fail to paint the true picture of the business’s balance-sheet. If receivables include debtors who are very unlikely to settle their dues, it would impact financial ratios that help determine the liquidity of the business and create a misleading picture to investors and creditors of the company.
As well as hitting profits, writing off bad debt can hinder the immediate cashflow. This is a huge problem especially when there are mounting debts and limited finances to service them.
All of these issues can play a negative role when it comes to growing the business. Seeking outside financial investment when bad debt has poked holes in your financial statements can become even more difficult. Even bank loans will become more difficult to secure with discrepancies like this.
Obviously, some bad debt is almost impossible to avoid especially if the third-party that owes it no longer exists. In most cases, continuing to chase the money owed over months and years until you have secured it could be the best outcome for SMEs.
The money can then be put back into the business to support growth. Now, It’s even more important as the Corporate Tax regime will ensure you are scrutinising your accounts and processes further, which can cause headaches down the line. So what should you do?
The first thing businesses need to do, as obvious as this may seem, is understand these new laws. They can have huge implications for a business and leaving it to chance is not an option.
Speak with a tax advisor and a qualified accountant. These professionals can cut through the complicated jargon and help you navigate these new rules to keep your business within the regulations.
Not only will this also provide clarity on what can be deducted from your profits subject to Corporate Tax, but it can also save you from a nasty surprise at the end of the financial year.
Secondly, when all the information from the experts is provided, a business must review and tweak policies to be in line with IFRS 9. Again, these can be confusing procedures to understand, which is why finding a qualified person that can understand the ins and outs of the law is paramount.
Corporate Tax laws are there to regulate, but they are also in place to protect businesses. With this in mind, there could be ways that a consultant may be able to ensure that you are able to claim your bad debt expenses in accordance with IFRS 9.
There will be more announcements and clarifications to the Corporate Tax. Making sure you are within the laws of it will help your business to thrive by benefiting from the tax relief available. Before you simply write off the bad debt, make sure you’ve explored every option first.