Things that you need to know before claiming input tax
It is possible to recover all input tax based on invoices? No.
This article we provide an overview of conditions to claim input Tax in UAE. VAT is an indirect tax govern by public (Government) which is imposed on goods and services at each stage. You need to fulfill certain conditions when you recover VAT as input tax.
Tax paid on the procurement’s / expenses is referred to as input tax. Unless otherwise specifically mentioned under the Decree Law UAE, the credit of such input tax shall be available to the registered person subject to fulfillment of prescribed conditions.
If you are not registered for VAT, you are not able to reclaim VAT on goods or services.
If you are registered for VAT, the general rule is VAT can be reclaimed on goods and services bought by the business to make standard, or zero – rated supply. Below conditions should be met,
- Recipient must be a registered person for VAT under UAE federal Tax Law.
- The recipient obtains and also keeps the tax invoice as specified in Executive regulation on Federal Decree-Law.
- The goods or services must have been acquired for an eligible purpose and used or intended to consume for make taxable product. (Exempt supply businesses cannot recover input tax, personnel expenses cannot recover input tax, entertainment expenses cannot recover input tax)
- The amount of VAT which the recipient seeks to recover must have been paid in whole and part, or have been intended to be paid. (Time frame to claim input tax)
Let us go into detail to understand on item 2,3 and 4 sated above. Item 1, is simple.
1. Registered person
The Taxable Person issued with a TRN (tax registered number) by FTA considered as registered person or Registrant If someone need to verify person/business is registered for VAT, they can log in to https://tax.gov.ae/ and enter the TRN and verify. This option is available to public to any TRN.
2. Tax Invoice
A Tax Invoice shall contain specified particulars in order to qualify as recoverable input tax invoice. Below is the content of full tax invoice as per the Article 59 of the Executive Regulations with regards to tax invoices.
- The words “Tax Invoice” clearly displayed on the invoice.
- The name, address, and Tax Registration Number of the Registrant making the supply.
- The name, address, and Tax Registration Number of the Recipient where he is a Registrant.
- A sequential Tax Invoice number or a unique number which enables identification of the Tax Invoice and the order of the Tax Invoice in any sequence of invoices.
- The date of issuing the Tax Invoice.
- The date of supply if different from the date the Tax Invoice was issued.
- A description of the Goods or Services supplied.
- For each Good or Service, the unit price, the quantity or volume supplied, the rate of Tax and the amount payable expressed in AED.
- The amount of any discount offered.
- The gross amount payable expressed in AED.
- The Tax amount payable expressed in AED together with the rate of exchange applied where the currency is converted from a currency other than the UAE dirham.
- Where the invoice relates to a supply under which the Recipient of Goods or Recipient of Services is required to account for Tax, a statement that the Recipient is required to account for Tax, and a reference to the relevant provision of the Decree-Law.
3. Eligible purpose
Every business has certain common business expenses which are incurred on a day to day basis. All are not qualified claim input tax.
The expenses on which input VAT recovery is blocked can be categorized as per below.
- Entertainment expenses
- Motor vehicle used for personal purpose
- Expenses incurred on exempt suppliers
- Some employee related payments
We can briefly explain these categories as follow,
VAT incurred on any costs which are used for a genuine business purpose, or which are incidental to a business purpose e.g. food and drink provided during a business meeting, shall be recoverable (subject to normal VAT recovery rules). However, where the hospitality provided becomes an end in itself and could be construed as the purpose for attending an event, such costs will be considered to be entertainment in nature and the VAT incurred shall not be recoverable. The type of entertainment expense which is not allowed for input VAT recovery include hospitality (Examples: Accommodation, food and drinks) which in not provide in normal course of meeting, access to shows or events, trips provided for the purpose of pleasure or entertainment. To understand more on the concept, FTA has issued guideline through public clarification. You can refer the same though this link – https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/05-VAT-Entertainment-Services.pdf
Motor vehicle used for personal purpose
In general, a person registered under VAT is allowed to recover VAT incurred on the purchase, lease or rental of a motor vehicle which is used for their business activities. However, Motor vehicle is used for the personal use of person in the company, it cannot be claimed VAT on expenses relating to motor vehicles and fuel expenses.
Here, a ‘motor vehicle’ is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including the driver. ‘Motor vehicle’ does not include a truck, forklift, hoist or other similar vehicles. This rule ensures that the VAT incurred on essentially commercial vehicles is not blocked due to incidental private use.
A motor vehicle will not be treated as being available for private use if it is within any of the following categories,
- A taxi licensed by a competent authority
- A motor vehicle registered and used as an emergency vehicle, including by the police, fire brigade, paramedics, or similar emergency services
- A vehicle which is used in a vehicle rental business where it is rented to a customer
Expenses incurred on exempt supply
Some of the selected supplies in the sectors categorized as exempt supply under UAE VAT law and treat as outside the scope of VAT. Examples of some financial Services, Sale or rent of residential buildings following the first supply, supply of bare lands, local passenger transport services etc. In such cases, input related exempt supply will not be able to recover. This area is complex and need to review case to case where most of the cases it will come under mixed supply and need special tax recovery calculations.
Some employee related payments
VAT paid on employees related expenses will not be recoverable by the business where the goods and services are purchased to be used by employees for no charge to them and for their personal benefits.
Above rules are not applicable following situation,
- Where the employer has a legal obligation to provide those goods or services to the employees under and applicable UAE Labor low.
- Where it is a contractual obligation or documented policy of the employer to provide those goods or services to employees, to enable them to perform their duty, and where it can be proven to be normal business practice to do so in the course of employment.
Example – VAT paid on Medical insurance on behalf of staff and their dependence need to evaluate accordingly. Not all the cases can claim full input tax on the same.
4. Time Frame to claim input tax
Input tax must be recovered in the first tax period in which two conditions are satisfied,
- The tax invoice is received
- An intention to make the payment of consideration of the supply before the expiration of six months after the agreed date of payment is formed
Upon receipt of a tax invoice, you can recover input tax only when an intention to make the payment within a prescribed period is formed. Hence, planned payment period is very important before you claim any input tax. Where a taxable person fails to make the payment of consideration before the expiration of six months after the agreed date of payment, the taxable person should reduce the input tax in the VAT Return of the tax period following the expiry of the six-month period. However, once the payment is made, the taxable person will again be entitled to recover the input tax.
For an example, if a company receive a tax invoice for AED 10,500 on 30th May 2020 and agreed to pay within 30 days. Hence payment due date is 30th June 2020 and the company claim its input tax of AED 500 during the tax period of 01st of April 2020 to 30th June 2020. However, if company fail to make the payments until 30th December, 2020 then the eligibility of claimed input tax of AED 500 is invalid. Hence, adjustments need to made after the 30Th December, 2020 in the tax return to reduced AED 500 in the input tax. Again, once the company made the payment in later period, it is allowed to claim input tax again after the payment.
Due to the time frame of input tax claim, companies must review age payable list with the due dates/ agreed payment dates with suppliers to closely review the eligibility of input tax claimed in earlier periods. FTA clarify time frame to claim input tax under the public clarification and please refer the same through the link https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/Time-frame-for-recovering-Input-Tax.pdf
VAT registered companies are responsible for VAT. They are eligible to set off their output VAT (Sales) with Input VAT (Expense). Companies cannot claim all input VAT and need to evaluate the eligibility on the same.
Hope this will help you to get understating on conditions to claim input tax in UAE. If you need help, please contact us through www.crevaty.com