In general, the VAT in the UAE should not be a cost to tax registered businesses. VAT incurred on business expenses and purchases could be recovered, subject to certain conditions being met.
However, in some situations, the business may end being the final consumer and hence cannot recover the VAT on certain expenses such as entertainment or employee-related expenses.
Who is entitled to recover VAT?
Only VAT registered businesses and individuals are entitled to recover VAT on their business expenses.
It is permissible to recover input VAT incurred on buying goods and services used or intended to be used in selling taxable goods and services in the UAE (or outside the UAE in case a UAE based company make transactions out of the scope of UAE VAT)
Fully recovered VAT
VAT can be fully recovered if it has been incurred on purchasing goods and services to make taxable supplies (or others above).
Partially recovered VAT
A business that sells both taxable supplies and exempt supplies, cannot fully recover the VAT incurred on buying the goods and services used to make such mixture of supplies.
For example, a real estate company that rent out buildings with both commercial (taxable) and residential units (exempt), can only recover VAT on the part of the purchases or expenses that are attributable to the commercial units. while the VAT incurred on any expenses attributable to the residential units would be considered a cost to the business.
Businesses that sells mixed supplies, must determine the part of the input VAT that can be recovered, using the FTA standard or special methods of input tax apportionment.
VAT on certain expenses are specifically blocked by law and cannot be recovered. Such expenses are:
Entertainment expenses: accommodation food & drinks, access to shows, events, or trips provided for pleasure or entertainment
Motor vehicles (if made available for personal use)
Employee-related expenses: goods or services for employee’s personal benefits (except if there is a legal or contractual obligation to provide such good or service)
How to recover VAT?
UAE businesses can recover VAT when they are filing their tax return where the VAT on expenses are deducted from the output tax or the VAT on sales.
The business’s tax liability is simply the difference between the VAT on sales payable (output tax) for a given tax period and the VAT on expenses (input tax) which is recoverable for the same tax period.
Where the output tax exceeds the input tax amount, a payment of the difference must be made to the FTA.
Where the amount of input tax exceeds the amount of output tax, a taxable person is entitled to a refund of VAT from the FTA.
What are the conditions for recovering VAT?
A registered business can recover input tax in the first tax period in which both of the following conditions are met:
A valid tax invoice is received and retained
The VAT has been paid or intend to be paid within six months of the payment due date
When to recover VAT?
If the VAT was not recovered in the tax period in which the above conditions have been met, it can be recovered in the following tax period.
If the tax invoice was not received in the tax period when the transaction was made, the input VAT can be recovered in the tax period in which the tax invoice is received.