Recoverable & Apportionment of Input Tax in UAE -AM Audit | Audit Accounting Firm in Dubai
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2021/09/23

Recoverable & Apportionment of Input Tax in UAE

Sohaib Basharat

Value Added Tax (VAT) is the tax added at every stage of value addition and the concerned person is only responsible to pay the VAT on value addition that he will collect from the customer. He will collect the VAT (output tax) on taxable supplies he has made and will adjust the VAT (input vat) he paid on his taxable purchases during that specific period. There are different provisions regarding the admissibility of the input tax. All the inputs paid by the taxable person are not admissible. Eligibility of recoverability is dependent upon the nature of the supply and timing of purchases and payments made against those specific purchases.

Input Tax Recovery Requirements

A taxable person is entitled to reclaim the input tax, subject to certain conditions: 

  • Should be utilized for taxable supplies;

The items or services on which input tax was paid should be utilized for the taxable supplies (i.e., supplies made at 5 percent or zero-rated supplies). Recovery of input tax is not allowed against exempt supplies. If purchases are being used partly for taxable supplies and partly for exempt supplies, then apportionment of the input tax is required.

Example:

  • Total purchases   = 1000 AED
  • Taxable supplies = 700 AED
  • Exempt supplies = 500 AED

Recoverable input tax =     Total purchases   /   Taxable supplies + Exempt supplies   X Taxable supplies

Recoverable input tax =     1000   /  700+500 X 700             

Recoverable input tax =    583.33 AED

Tax Invoice;

To claim the input vat it is compulsory for the taxable person to have a tax invoice. The recipient of the taxable supplies should guarantee that the tax invoices related to the supply are collected and preserved in records. Details on supply in relation to the recovery input tax are required from the Tax Invoice.

  • Payment;

Apart from the tax invoice to claim the input tax it is also compulsory for the taxable person to make the payment or intended to make the payment within six months.

VAT Refund for UAE Nationals

You may receive a reimbursement of the VAT paid on building a new house for use when you are a UAE national. As a taxable supply under the UAE VAT law, a person is even responsible for building a residential building and must pay tax on construction costs, including building supplies, contracting bills, as well as many others. However, the tax paid on the building of the new house can be reimbursed under the Vat refund scheme for UAE citizens under specific conditions. This VAT reimbursement plan is helpful for UAE Nationals to decrease their VAT expenses paid while building a new house.

Exempt Supplies

Under VAT in the UAE, registered companies can reclaim the value-added tax paid on the procurement of goods and services for the purpose of taxable supplies. This is subject to the conditions.  Furthermore, some supplies are not permitted to recoup input tax. 

  • Supplies for the production of exempt supplies;

Some commodities, such as local passenger transport supplies, bare land supplies, etc. are deemed free from VAT legislation.

  • Non-employee entertainment services;

Entertainment services given to non-employees shall not be recovered input taxation by the taxable person. Non-employees may include consumers, customers potential, officers, shareholders, proprietors, or investors. Note that entertainment services include all kinds of lodging, meals, and beverages not supplied in the usual course of a conference as well as access to entertainment, performances or events, or journeys for fun or entertainment purposes.

  • Automotive vehicles for personal purposes;

Where a registered person buys, rents, or leases motor vehicles, but is not used for the personal use of a registered company in the business, the tax paid for the purchase, rental, or lease cannot be reclaimed. Here, a motor vehicle, including the driver, denotes a road vehicle that was built or equipped to transport up to 10 passengers. Not included are trucks, forklift trucks, hoists, and similar vehicles.

Example:

Total supplies    = 50 unit @ 20 = 1,000 AED

Output Tax        = 50 AED

Total Purchases = 50 Units @ 15 = 750 AED

Input Tax           = 37.5 AED

Tax payable       = Output tax – Input Tax

                            = 50 – 37.5

Tax payable       = 12.5 AED

Understanding and Implementation

The input tax recovery provision is therefore an essential part of VAT in the UAE. Registered persons have to make sure that they can identify supplies against which input tax can be recovered, date of a tax invoice and the date of the payment is also needed to consider before claiming the input tax against the output tax collected from the customers. This helps to ensure optimal cash flow and working capital in the company. The usage of VAT software may facilitate all this work, which helps automate every single process in the input tax credit and output tax that allows you to focus on your enterprise’s insufficient time and resources. Moreover, registered people can consult experts like AM Audit to help them with input tax matters and claim ability.

AM Audit is a group of trained and experienced professionals who offer many services to entrepreneurs and small and medium companies. To get help and consultation on the VAT process as well as the eligibility and process of input tax refunds get in contact with AM Audit.

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