Conditions to claim input VAT in UAE

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,

  1. Recipient must be a registered person for VAT under UAE federal Tax Law.
  2. The recipient obtains and also keeps the tax invoice as specified in Executive regulation on Federal Decree-Law.
  3. 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)
  4. 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,

Entertainment expenses

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

Conclusion

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

Cloud Accounting – The best way to future-proof your business accounting

Every industry changes with time- so is accounting. It is a widely-held opinion among the world’s leading accounting commentators that the future of accounting is online. Today accounting sector is evolving vigorously than ever before- specially due to the advancement in technology and internet. Since we all are well aware of the state of the accounting sector at present, let’s have a look at how the future of accounting is going to be like with cloud accounting.  Among other cloud solutions, Xero is our best recommendation. Let us look in to detail how Xero can bring the change you need.

More businesses go online

It’s evident that more and more businesses are embracing digital technology to manage their business operations. If you have buried your head in the sand about online accounting then it’s probably time you came up for air. When you are looking for a digital solution to handle your accounting you can’t go wrong with Xero as the platform enables you to digitalize your entire accounting process delivering many benefits.

Anytime anywhere access

Specially with the Covid-19 pandemic, businesses have understood the importance of giving their teams the opportunity to work location independently. Offering ultimate location independent accounting solutions with cutting edge features to enable accountants, bookkeepers and teams to collaborate, anytime anywhere, Xero will introduce an operational flexibility of next level.

People becoming time-poor every day

Every day people are getting busier thus becomes more impatience to get done everything fast. Therefore, businesses will have to find new ways to speed up their accounting processes while keeping the costs to the minimum. Using an effective accounting system like Xero will ensure fast accounting processes from generating invoices to creating reports.

Need of simplified payment process to get paid faster

Speeding up your payment process will significantly affect your cash flow. Enabling you to improve the speed of your cash flow in ways you never thought was possible before, Xero comes with features to such as instant invoice generation, online payment and quick payment reminders and more.

Consumers seek more and more cost-effective but high-performance business partners

Everyday businesses are looking for ways to achieve high performance at low costs. Xero is one of the state-of-the-art accounting platforms that enable you to do just that. Automating many of your accounting functions, the system lets you get done more work in lesser time with a smaller workforce while speeding up everything.  With unbelievable functions and features, the platform delivers you transformative accounting solutions, that redefine how you’ve been doing accounting and bookkeeping in your business.

Xero | High-efficient accounting system of the future

With over years of experience and close to two million of client base from around the globe, Xero is the future of accounting. Introducing the accounting of future, today for businesses with incredible features such as invoicing, payroll, bank connections, bank reconciliations, inventory, quotes etc. the system will handle all your accounting functions from A -Z saving you time, money, hassle and headache.

Conclusion

With advancement of the technology, evolution of business landscape and customer expectations, how you’ve been doing accounting for the last 5 years won’t work soon. When it won’t, your business has to be ready to go with the flow strengthening your business accounting processes than ever before.

As experienced accountants in U.A.E. our recommendation is to embrace the change now to future proof the accounting of your business and to save time, money and hassle. If you are interested, Crevaty is happy to guide you on how your organization can adopt to Xero. Contact us today for more information.

Why you should Automate your payment process immediately.

When you are processing payments for different recipients in different currencies, the management behind the scenes in transactions can get out of the control quickly. This can hinder your business growth in a great deal.

The amount of manual work of the payment processing will take more and more of your team’s time and effort while reducing the efficiency and the accuracy of the process. Automating your payment process can deliver a solution to all your payment processing struggles once and for all. 

Let’s have a look at what is payment process automation and how it can help you improve your organization’s payment proces.

What is payment process automation?

Payment process automation is automating your bill payments with an electronic system. The system enables to computerize all your bills, transactions and payment records offering you an integrated solution. Major role is playing your software solution provider to enhance the entire process to minimize the manual intervention.

This start at the purchase order level and it has a flow of transaction from the beginning with the underlining supporting and records. When an organization start with the PO, then it will be ended with the payment. In between this process organization face so many challenges to make sure what they pay is correct in terms of party, amount and to the extent purchases made. Many organizations moving traditional cash or cheque payment to digital method to minimize the errors and improve efficiency.

There are two ways entities can improve payment automation process.

1. Use existing channels

2. Software solution

Use existing channels

There are basic ways to automate your bill payments: through your bank, your creditors, and your credit card company. Automating your bills ensures that you never miss a payment or pay a late fee again. You’ll also save money on postage, envelopes, and checks. While you can delegate bill payment, you still need to monitor the situation. Errors can be time-consuming, frustrating administrative hassle to find and fix. Putting bill payments on autopilot is an attractive method of dealing with the necessary evil of paying the bills. It’s easy, effortless and (most importantly) free.

A) Through Your Bank

By providing the bank with information about all of the bills that you need to pay each month and authorizing your bank to pay them on your behalf, you can easily remove the stress from monthly bill payments. Under this option, the bank automatically takes the money out of your account each month and sends it to your creditors. This is good for fix amount payments on monthly or quarterly basis.

In a variation of this, you can use your bank’s online bill payment system. In this scenario, you set up a list of creditors that you can transfer payments to at the push of a button, much the same way as you would move money between your checking and saving accounts each month. It’s not exactly automatic, but it is relatively convenient and cuts down on the time and expense of using stamps and envelopes. It also provides control over the date that bills are paid, and the amount that is paid on them.

B) Credit Card Company

You can provide your credit card company with information about all of the bills that you need to pay each month, and authorize the company to pay them on your behalf. Many debit cards also offer this service. This is good for fix amount payments on monthly or quarterly basis.

Software solution

This is relatively effective when you have more volume of payments for different vendors. All the flow will be managing your software at each phase. It initiating relevant section taking proposals to procurement, taking approval for proposals and raising LOPs. Then obtaining the services and goods recorded in the system with the documents and approvals from relevant parties in the organization. Then generating bulk payments for vendors though system and relevant approvals and checking the relevant documents in the system. Banks are interlinking to the software or adding payment merchants to the system is also available.  There are number of payments chancels available and your entity can add them to the system with minimal transaction base payments.  You may refer below services providers and most of them is available to add your software.

1. PayPal

2. Due

3. Stripe

4. Flagship Merchant Services

5. Payline Data

This method relatively expensive as it has to invest in the system and adding payment channel also has cost element. However, today most of the medium to large companies use electronic process to improve efficiency in the payment process.

Reasons to automate payment process immediately

Saves money 

You could easily make sure your invoices are processed faster and more effectively than ever before. This will ensure that your suppliers are getting paid fast while enabling you to capture early discounts. Payment automation will also save you costs involved in cheques and manual processing.

Cheaper transactions

You can save a significant amount of money with electronic payments when compared to paper cheques. According to researchers, it costs way more to processes a paper cheque than it compared to an automatic clearing house (ACH) credit transaction and card transaction. With payment automation, you can save all the paper cheque processing money.

Fraud prevention

Use of cheques is one of the most common payment methods of frauds. This has been an increasing trend year by year among those who are attempting or committing fraud. By using payment automation, you can avoid the use of cheques thus decreasing threats of payment frauds. 

Reduced errors

When you are dealing with many invoices and transactions manually, errors are inevitable. Duplicate payments, delays due to payment declines, missed payments are some of the few errors that companies are often experienced. When you adopt an automated payment process in your organization you can easily reduce the amount of manual work related to payment processing. Thus, you will be able to increase the accuracy and efficiency of your transactions.

Better visibility

Another benefit of payment automation is that it will allow you to have better visibility over your cash flow. An automated solution will enable you to track, monitor and manage your transactions right from your screen thus giving you a better ability to capture more clear financial data. The solution comes with advanced analytical tools as well which will help you analyze your payment processing data to understand and predict your cash flow better.

Improved supplier satisfaction 

Payment automation makes your payment cycles shorter which your suppliers will be very happy about. The system will enable you to work on your invoices effectively regardless of the number of invoices you receive a day. Thus, your suppliers will get paid faster-decreasing sales outstanding and helping you build better relationships with your suppliers.

We can guide you through out your automation process. Please contact us through info@crevaty.com

We welcome Mr Imalka Chandrasiri to our Crevaty Dubai office.

We welcome Mr Imalka Chandrasiri to our Crevaty Dubai office. He was with us for last two years in Sri Lanka office and performed well during his period in Sri Lanka. Imalka is from Rajanganya (out of Colombo) and shown his interest in education successfully completing advance level examination with 3As in commerce stream and entered in to the Wayabe University of Sri Lanka to follow degree B.Sc. Special in Accountancy and Business Finance. Once he completed his higher education from university, he started accountancy studies from the Institute of Chartered Accountants of Sri Lanka (ICASL) and currently he is in the process of completing his professional education. He is also following Certificate of Management Accounts (CMA) of Sri Lanka.

Imalka is proving his capabilities to manage client’s requirement and demand. Dubai will be new experience for him and he like to learn and explore new opportunities. Mr Imalka needs to deal with clients directly and client interaction is the key. He also needs to attend client demands on day to day basis. He will share new experience and knowledge with Sri Lanka team for better services. We, Crevaty is on the view that on the job training is more powerful.

He needs to help Dubai team to meet clients on regular basis and provide explanation to clients on various assignments. This will improve his soft skills and he will be able to manage client portfolio independently.

We wish him good luck for the new challenges.