In the context of VAT in the United Arab Emirates (UAE), registered businesses can typically seek reimbursement for the VAT incurred when procuring goods and services for their operational needs, as stipulated in our prior article. Nevertheless, there are specific categories of supplies where the recovery of input tax is not permitted. Let’s delve into these categories:
1. Supplies for Exempted Purposes
Certain supplies are designated as exempt under the UAE VAT Law, such as the provision of local passenger transport or the sale of undeveloped land. VAT paid on inputs used for these exempt supplies is non-recoverable. For instance, if Fatima Transports in Dubai buys 10 units of Item A at AED 1,000 each, incurring AED 500 in VAT at a rate of 5%, and uses these items to offer a local passenger transport service (an exempt category), they cannot recover the AED 500 VAT paid on the purchase.
2. Entertainment Services to Non-Employees
Input tax recovery is not applicable to registered businesses for entertainment services provided to non-employees, including customers, potential customers, officials, shareholders, owners, or investors. This encompasses various forms of hospitality, such as lodging, food, and beverages not typically offered during business meetings, as well as access to entertainment events or trips meant for leisure. For example, if Ali Automobiles offers a three-day accommodation package to a client visiting their business premises, incurring AED 50 in VAT on a hotel tariff of AED 1,000, they cannot recover the input VAT as this constitutes an entertainment service provided to a non-employee.
3. Personal Use of Motor Vehicles
If a registered business acquires, rents, or leases motor vehicles for business purposes but an individual within the business uses them for personal reasons, the VAT paid on the vehicle’s purchase, rental, or lease cannot be reclaimed. It is essential to note that this rule applies to road vehicles designed for the transportation of up to 10 people, including the driver, excluding trucks, forklifts, hoists, and similar vehicles. There are exceptions, however, such as vehicles licensed as taxis, those utilized for emergency services, and those engaged in vehicle rental businesses.
For example, if Ali Automobiles in Dubai purchases 10 cars from a local manufacturer, and one of these cars is used personally by the owner, the input tax paid on the personal-use car cannot be recovered.
4. Goods or Services for Employee Use
Registered businesses cannot claim input tax recovery on goods and services acquired for the personal benefit of their employees, provided that employees do not bear the cost of these items. Nonetheless, there are scenarios where recovery is permitted:
– When it is mandated by labor laws in the UAE or a designated economic zone.
– When it is part of a contractual agreement or documented company policy, intended to facilitate employees’ job performance and aligns with common employment practices.
– When the provision of goods or services is considered a deemed supply.
For example, if Ali Automobiles purchases gym equipment for employee use and provides it to employees as a non-chargeable benefit, incurring AED 2,000 in VAT, they cannot claim input tax recovery because the gym equipment serves a personal benefit to employees.
Hence, businesses registered for UAE VAT must be diligent in identifying these categories of supplies where input tax recovery is not permissible. Input tax should only be reclaimed for supplies eligible for such recovery.
You can also register for VAT Registration on our website:
https://www.vat-registration-uae.com/
