Input VAT Claim and Input Tax Apportionment in UAE
In the regular course of business, companies incur expenses that are subject to VAT. Understanding which of these expenses can be recovered is crucial for managing costs effectively. If an expense is tied exclusively to non-business or exempt supplies, the VAT paid on it is non-recoverable. Ensuring that your business claims all eligible input VAT without falling into common compliance traps is essential for maintaining healthy cash flow.
HLB HAMT Management Consultancy (HHMC) helps businesses identify recoverable VAT and manage their input tax effectively. By offering expert guidance and eligibility assessments, we ensure that you can recover VAT on purchases where applicable, while avoiding potential pitfalls that may lead to compliance issues.
Not every purchase needs to be linked directly to a sale in your accounting system. In fact, some items may be consumed in the day-to-day operations of the business rather than being sold onward. What’s important is to distinguish between expenses that can generate VAT recovery and those that cannot.
Certain types of expenses, such as:
- Entertainment costs
- Motor vehicles used for personal purposes
- Employee-related expenses
In certain circumstances, goods or services will be used partly in the course of making supplies that allow for the recovery of input tax and partly for making supplies for which VAT is not recoverable. Where an expense is used for making such mixed supplies, the taxable person must determine the portion of the input tax that can be recovered.
Apportionment of Input Tax in UAE
Input tax incurred on goods or services that are partly used for supplies eligible for VAT recovery and partly for supplies that do not qualify for VAT recovery is referred to as “residual” or “overhead” input tax. This residual input tax must be divided between the activities that allow VAT recovery and those that do not. The VAT recovery will be limited to the portion related to VAT-eligible supplies.
To calculate the recoverable portion of residual input tax, it is necessary to assess the extent to which purchases contribute to recoverable supplies. The resulting percentage from this calculation is then applied to the residual input tax to determine the exact amount that can be reclaimed.
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Input Tax Apportionment Calculation in UAE
To determine the recoverable input tax for the business, the taxable person should apply the following standard calculation:
- Calculate the total value of input tax which is directly attributable only to supplies for which VAT may be recovered.
- Calculate the total value of input tax which is directly attributable only to supplies for which VAT cannot be recovered.
- Calculate the percentage to be applied to the residual input tax by dividing the total value of input tax identified under Step 1 by the sum of the input tax identified under Step 1 and Step 2. The percentage should be rounded to the nearest whole number.
- Multiply the total value of residual input tax by the percentage calculated under Step 3. The resulting amount is the amount of residual input tax which can be recovered by the taxable person.
- The total input tax that will be recoverable by the person for the period is the input tax calculated in Step 1 and Step 4.
It should be noted that the FTA has discretion to allow taxable persons to use an alternative method of input tax apportionment from a list of methods it makes available, if the default method does not provide an outcome which is reflective of the actual use of the acquired goods or services. Such approval will be granted from the second year following the implementation of VAT in the UAE. Where the FTA has approved the use of an alternative method, the taxable person must continue using it for at least two years from the date of approval.
Annual Wash-up calculation
At the end of every “tax year”, a taxable person must perform a wash-up calculation to determine whether the overall recovery percentage calculated over the course of the year corresponds with the recovery percentages calculated for tax periods during that tax year.
The tax year of a taxable person is dependent on the person’s tax periods. Specifically:
- For a taxable person registered for VAT on a quarterly tax period basis, the tax year is identified as follows:
- where the taxable person’s tax period ends on 31 January and quarterly thereafter, the tax year ends on 31 January;
- where the taxable person’s tax period ends on last day of February and quarterly thereafter, the tax year ends on the last day of February; and
- where the taxable person’s tax period ends on March and quarterly thereafter, the tax year ends on 31 March.
- For a taxable person registered for VAT on a monthly tax period basis, the tax year ends on the last day of the calendar year.
The annual wash-up calculation requires the taxable person to:
- Calculate the residual input tax which would have been recoverable if the residual input tax calculations were done for the whole tax year; and
- Compare the residual input tax calculated for the entire year with the residual input tax actually recovered in all the tax periods throughout the tax year.
If the above comparison shows a difference, a corresponding adjustment must be made in the first tax period following the end of the relevant tax year. The adjustment will result in either additional recoverable input tax or a reduction in the input tax already recovered.
Furthermore, if there is a difference of more than AED 250,000 in any tax year between the recoverable input tax as calculated in accordance with the method described in this section and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of the goods or services, then the taxable person should make an adjustment to the input tax in respect of the difference. The adjustment must be made in the first tax period following the end of the relevant tax year.
If the difference is less that AED 250,000, no adjustment is required to be made.
Our Approach to Input VAT Recovery and Apportionment
- Eligibility Assessment for Input VAT Recovery: We guide your business in identifying recoverable VAT and ensuring eligibility, avoiding common compliance issues and enhancing your cash flow. Our team provides clear guidelines on which expenses are recoverable and which are blocked, such as entertainment, personal motor vehicles, and employee-related expenses.
- Input Tax Apportionment: For expenses that serve both VAT-eligible and non-recoverable supplies, our team performs an apportionment calculation to determine the portion of VAT that is recoverable. This includes identifying direct and residual input taxes and calculating the recovery percentage to apply accurately.
- Annual Wash-Up Calculation: At the end of each tax year, a wash-up calculation is necessary to align the actual VAT recovery with the apportionment estimates made throughout the year. We assist in comparing the recoverable input tax calculated for the year with what was claimed during each period, making any adjustments as required.
- Alternative Apportionment Methods: For businesses where the standard apportionment method may not reflect actual VAT use accurately, HLB HAMT Management Consultancy (HHMC) can assist in applying for an alternative method with FTA approval, optimizing VAT recovery over time.
HLB HAMT Management Consultancy (HHMC) to Assist!
Accurate input VAT recovery is essential for optimizing your business’s cash flow and maintaining compliance. With HLB HAMT Management Consultancy (HHMC)’s expertise in input tax apportionment and annual wash-up calculations, we ensure your VAT recovery is aligned with FTA requirements, minimizing risks and enhancing financial efficiency.
Excellence in Tax Consultancy services with HLB HAMT Management Consultancy (HHMC)! Get in touch today. Your success is our priority!
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