Every business has certain expenses that are incurred on a day to day basis. With the introduction of VAT in UAE, certain types of expenses of businesses are not allowed for input tax recovery as per the UAE Federal Tax Authority
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This means VAT on business expenses (input tax) is not always recoverable. In general, you can only recover input tax on goods or services to be used for running business operations. This means that anything not used wholly for business purposes will have the recovery of input tax blocked in whole or in part.
Also Read: Output VAT Adjustments
VAT input recovery is blocked for the following expenses:
Recovery of VAT on entertainment services provided to non-employees is specifically blocked. Non-employees include customers, potential clients, shareholders and investors.
There are different types of entertainment expenses that are not allowed for input VAT recovery include hospitality which are provided in the normal course of a meeting, access to shows or events and trips provided for the purposes of pleasure or entertainment.
Motor vehicles used for personal purpose
A business or a taxable person under VAT is allowed to recover VAT incurred on the purchase, lease or rental of a motor vehicle used for business activities. However, if the motor vehicle is made available for the personal use of any person in the business, the registrant will lose the right to recover the VAT incurred on the purchase, lease or rent of the said motor vehicle.
Here, a ‘motor vehicle’ is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including driver.
A motor vehicle used in the business is not treated as being available for personal use in the following cases:
- It is a taxi licensed by the competent authority within the UAE
- It is a registered vehicle and used for the purpose of an emergency, including by police, fire, ambulance or similar emergency service.
- It is used in a vehicle renting business, where it’s to be rented by a customer.
Employee related expenses
Certain expenses incurred by a business for employees are not allowed for input VAT recovery. The VAT paid on employee-related expenses will not be recoverable by the business if the goods or services are purchased to be used by employees with no charge from them and they are for their personal benefit.
But there is a certain exception to this rule
When the employer has a legal obligation to provide those goods or services to an employee under the applicable UAE labor law and it is included in the labor contract, the employee-related expense may be recovered for VAT.
For example: In the employment contract of a call center employee it is promised that the conveyance to and from the office will be given for late-night shifts. Here, as this is a contractual obligation to employees, the organization can recover the VAT paid on the conveyance expenses.
VAT Recovery Services in UAE
The VAT on input expenses can be recovered depending on certain circumstances and the VAT law of UAE. If you want to know more about the VAT treatment contact VAT experts. If you are finding it very difficult to keep track of all these rules, especially for large companies, a possible solution is to turn to a VAT consultant in UAE who has vast professional experience in taxation with various industries in the region.