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

VAT Liability on Jointly Owned Properties – UAE

VAT on Jointly Owned Properties (JOP) / Owners Associations (OAs)

It was always debatable topic VAT on JOP in the United Arab Emirates (UAE), till the Federal Tax Authority (FTA) issued guidelines on real estate VAT, which has been covered the VAT liability of JOP/OAs in the year 2018. There are plenty of opinions from different parties still in the market on VAT liability relating to services charges. Main reason for that is there is no legal establishments in many cases for JOP/OAs in the industry. But FTA has issued clear guidelines to follow. Let’s go in to details to understand and identify practical issues facing JOP/OAs in terms of tax environment.

What are JOPs/OAs

JOPs/OAs are often established to manage and administer the common areas of a building on behalf of all of the unit owners of a building. They commonly deal with issues such as cleaning, maintenance, security, etc. and are often comprised of members who are the owners of the individual units themselves. JOP/OA is normally responsible for the procurement of services required to maintain the upkeep of the property and collects money from all the owners of individual units within the property in order to pay the expenses of contractors or to fund major refurbishment works. JOPs/OA’s are usually not-for-profit organizations or associations, but they can take many different legal forms. They are not normally incorporated legal entities, but instead they could be,

  • A legal partnership between the members.
  • An association with legal status, registered under laws concerning joint property ownership.
  • An unincorporated group or association with no legal personality/status.

In UAE due to non-availability of legal existence for many JOPs/OAs, there is an entity which help the activities of JOP/OA called Management Entity (ME). ME can be a developer or management company contracted to manage the building. Normally ME is entered in to the contracts with the third parties and take responsibility on behalf of JOP/OA.

According to the Law No. (6) Of 2019, regarding Ownership of Jointly Owned Property in the Emirate of Dubai, the Owners’ Association Management Companies have given more responsibilities to act on behalf of JOPs/OAs.

Is JOP/OA required to be registered for VAT purposes?

JOP/OA will be required to register for VAT where any of the following applies,

  • It exercises any form of control, management and administers the common areas, including dealing with issues such as maintenance, security, rule enforcement, general well-being of tenants, financial management and engagement with statutory authorities.
  • It has a legal personality distinct from its members e.g. where it is registered under laws concerning joint property ownership and is constituted as a formal partnership, etc.
  • It undertakes an economic activity.
  • It makes supplies which would be taxable supplies if the entity was registered for VAT.
  • Its taxable turnover exceeds the mandatory registration threshold.

VAT liability on JOP/OA services

The VAT liability of supplies made by JOP/OA may vary depending on the nature of the supply made by the JOP/OA.

A) Type of income generated by JOP/OA and VAT impact,

  • Service charge – Service charge is the cost of maintaining the property and includes the costs for cleaning, maintenance, security, repair jobs of the common areas in the property. If the JOP/OA has ability to register for VAT, Service charge is a taxable supply and it will be charged at 5% of standard rate of VAT.
  • Other Income – JOPs/OAs are generating several types of other income by providing different service activities to its unit owners such as car wash income, access card income, rental income from renting out roof tops, etc. which also can be considered as taxable supply and will be charged at 5% standard rate of VAT.
  • Penalty Income – Penalty charges are charged on the delay of service charge payments and it will not be considered as taxable supply and VAT will not be charged.

Practical concern – Can non resident unit owners get VAT invoice on the services charge?

Yes. Service charge is related to the real estate property situated in UAE, need to charge VAT irrespective of the unit owner residency status.  According to the Article (31)of the executive regulation to qualify as zero-rated export services, there are conditions to comply. One of them is the services are not supplied directly in connection with real estate situated in the State. The services charges always connected to the buildings situated in the UAE, irrespective of the residency status of the unit owner, VAT will apply.

B) Recoverability of Input VAT on JOP/OA

Hence, JOP/OA will be required to charge 5% VAT on service charges and if JOP/OA registered under VAT, will be allowed to recover any VAT incurred on services it purchases from third parties for the purposes of maintaining the building. All normal input tax recovery rules apply for the JOP/OA in the UAE.

Practical concern – Can JOP/OA claim invoices under the name of ME?

In some cases, tax invoice is raised by the service provider under the name of ME (Developer or JOP/OA manager) as the contracts are under the name of ME. In some scenarios service provider are not willing to change the customer details without proper legal existence of an entity in UAE. Under the normal input tax recovery rules in UAE, it is not possible to claim input tax without proper tax compliant invoice. In this case JOP/OA should ask services provider to re-issue the same invoice at the first time to correct VAT registered name of the JOP/OA with the TRN number and other details. If this is not possible, JOP/OA need to obtain recharge tax invoice from the ME to stay and comply with the tax system.

We, Crevaty can help MEs or JOPs to comply with VAT requirements in UAE as we have team of people who are daily assisting many MEs or JOPs.

For the further information please refer section 08- Real Estate VAT guide issued by FTA, 2020 April.

Maintaining books of accounts is mandatory in UAE

Maintaining books of accounts is mandatory in UAE

Bookkeeping is important for any business in U.A.E., large or small. Unfortunately, many businesses neglect the bookkeeping process in their business which later leads them to huge business failures.

The reason for this is either business owners’ lack of knowledge on the subject while others take it so lightly and don’t pay enough attention to keep up with the bookkeeping process effectively.

Either way, lack of proper books of accounts for a business always ends up in a nightmare no matter which industry you are in. Which is why in this article we discuss the U.A.E. Federal law you need to be aware of regarding bookkeeping in your business.

Before that’s let’s start by explaining what is bookkeeping for those who don’t have a clear idea what bookkeeping exactly is.

What is bookkeeping?

In simple words, bookkeeping is the process of recording financial transactions of a business. This is the very first step and the central aspect of the accounting process. Here, accurate, up-to-date, detailed records are been kept of all the aspects of financial accounting, preparing source documents for all operations, transactions, and other events of the business. From purchases, sales, receipts to payments by a person or another organization is recorded during the process.

Without a well maintained and well-organized bookkeeping process maintaining a healthy accounting process is impossible. The way of doing bookkeeping has changed significantly over last decade all over the world. Thanks to the cloud computing, there are number of sophisticated solutions available in the market for monthly fees where business can enjoy latest developments and it has gone to digital era. The technological developments as well the competition of providing value added services of the bookkeeping firms really benefited the business to have up to date bookkeeping system without considering the size or volume of the business.

Below are some mostly used solutions for SMEs worldwide. (Top 10 SMEs accounting software’s in the year 2019)

  1. Xero
  2. Fresh books
  3. Quick book
  4. Sage 50 Cloud
  5. Zoho books
  6. Sage
  7. Free Agent
  8. Netsuite ERP
  9. Tipalti
  10. Sage business cloud accounting

Further in UAE, there are some accounting software’s are listed in the FTA website which help business owners and or accountants to ensure they are compatible with UAE VAT requirements. You can find out such software’s through below link.

https://www.tax.gov.ae/en/tax-support/tax-accounting-software-vendors/accredited-accounting-software-vendors

U.A.E. tax law for bookkeeping

According to the U.A.E. tax law, every business must maintain books of accounts. As per the Federal Law No. 7 of 2017 on Tax Procedures, every company should keep books of accounts of at least of 5 years from the end of its financial year.

And it’s a duty of the shareholders and the partners of the business to ensure that the bookkeeping process is been maintained according to the provisions of the tax law.

In accordance with Cabinet Decision No. (36) of 2017 on the Executive Regulation of Federal Law No. (7) of 2017 on Tax Procedures, it has established the responsibility with regards to the proper books of accounts that business owners need to maintain. Below are the articles you may refer to know exact requirements.

Article (2) Keeping Accounting Records and Commercial Books

Article (3) Period of Record-Keeping

Article (4) How to Keep Accounting Records and Commercial Books

Article (5) The use of a language other than the Arabic

Article (2) Keeping Accounting Records and Commercial Books

1. Accounting Records and Commercial Books shall include the following:

a). Accounting books in relation to that Business, which include records of payments and receipts, purchases and sales, revenues and expenditures, and any business, and any matters as required under any Tax Law or any other applicable law, including:

1) Balance sheet and profit and loss accounts.

2) Records of wages and salaries.

3) Records of fixed assets.

4) Inventory records and statements (including quantities and values) at the end of any relevant Tax Period and all records of stock-counts related to Inventory statements.

b).Additional records as may be required in the Tax Law and its Executive Regulation.

2. In addition to the Accounting Records and Commercial Books mentioned in Clause (1) of this Article, the Authority may require any other information in order to confirm, through an audit trail, the Person’s Tax obligations, including any liability to register for Tax purposes

Article (3) Period of Record-Keeping

1). Every Person holding and maintaining any of the records mentioned in Article (2) of this Decision, shall keep these records in a manner that enables the Authority, or an officer authorised by the Authority, to ascertain that Person’s Tax obligations, as follows:

a). For a period of (5) years after the end of the Tax Period to which they relate in the case of a Taxable Person.

b).For a period of (5) years from the end of the calendar year in which the concerned document was created in the case of non-Taxable Person.

c). For a period specified in the Tax Law for real estate records.

2). The Authority may, before the expiry of the period specified in paragraph (a) of Clause (1) of this Article, inform the Person to retain the records for a further period not exceeding (4) years, in cases where he is required to do so including the following:

a).If the Taxable Person’s tax obligations are subject to a dispute between him and the Authority.

b) If the Person is being subject to a Tax Audit and that Tax Audit has not yet been completed.

c). If the Authority has given notice to the Person that it intends to conduct a Tax Audit before the expiry of the period specified in Clause (1) of this Article.

3. If a Person is no longer a Taxable Person, he shall be required to comply with the provisions of paragraph (b) of Clause (1) of this Article.

4. Where a Person enters into bankruptcy proceedings, his Legal Representative is required to keep the records of that Person for 12 months from the date on which those proceedings have come to an end.

5. For the purposes of Clause (4) of this Article, should the Authority require the records to be kept for a longer period, it may take possession of them, at a time agreed with the Legal Representative responsible for the relevant bankruptcy proceedings.

Article (4) How to Keep Accounting Records and Commercial Books

1. Unless otherwise required by the Tax Law, the obligation to maintain Accounting Records and Commercial Books shall be met through any of the following:

a). Creating the record and the retention of original Documents which support the entries contained in the record.

b). Creating the record and preserving the information that was contained in the original document, provided that:

1) The information matches the data contained in the original document, and shall be available during the periods referred to in Article (3) of this Decision.

2) The information retained or stored in either photocopy or electronic form, and an easily readable copy of it can be reproduced within a reasonable period, if requested by the Authority.

2. The Authority may lay down the rules of preserving information contained in Accounting Records and Commercial Books, and impose such reasonable requirements for ensuring that the information will be as readily available to it as if the original records themselves had been preserved.

Article (5) The use of a language other than the Arabic

1. Tax Return, data, information, records and other Documents related to any Tax shall be submitted to the Authority in Arabic, as per the mechanism specified by the Tax Law.

2. As an exception to Clause (1) of this Article, the Authority may accept data, information, records and other Documents related to any Tax to be submitted to it in English; the Authority may, at its discretion, request the Person to translate some or all of these to Arabic.

3. Where the data, information, records and other Documents related to any Tax are issued in any foreign language other than English, the Person is required to submit these Documents to the Authority as translated into Arabic.

4. The Person submitting any translation of data, information, records and other Documents related to any Tax to the Authority shall be liable for the accuracy and correctness of the translation, and shall bear all associated costs. The Authority shall have the right to rely on the translation provided.

Please click following link for related laws.

https://www.tax.gov.ae/-/media/Files/FTA/links/Legislation/Federal-Tax-Procedures/02-Cabinet-Decision-no36of2017-on-Executive-Regulation-on-Tax-Procedures.pdf

Violation of the law

Violation of the above law might land businesses in penalties and specially reputation damage in the market is more costly and many other problems.

Apart from to comply with the VAT requirements, there are many benefits to bookkeeping. Following are a few of them

  • Track and complete control on the business
  • Ensure better financial analysis and management
  • Make reporting to business partners, banks and possible investors
  • Ensure easy fulfilment of tax obligations
  • Better cash flow management
  • Make business planning easy
  • Reduce financial risks

How Crevaty can help to maintain books of accounts as per U.A.E. tax law!

Although you are quite sure you need to be more serious about your bookkeeping process now, yet have no clue from where to pick it up from or from where to start, worry no more. Because we have the perfect solution for you.

Being experienced bookkeepers in U.A.E. we offer comprehensive bookkeeping outsourcing services in U.A.E. taking the hassle out of the process. So, the business owners can have peace of mind.

Not like having a bookkeeper in U.A.E. outsourcing your bookkeeping to us will leave you with many benefits including

  • Save time to focus on important business matters
  • Low costs
  • Lower turnovers and no statutory requirements and payments to staff
  • Unbiased opinion
  • Let you have experts in your industry
  • Digital bookkeeping solutions
 Learn more about our bookkeeping services in U.A.E. www.crevaty.com
Posted in Tax