Under UAE VAT, registered businesses are entitled to recover VAT paid on the purchase of goods and services for business purposes. Of course, this requires meeting the conditions described in the previous article. Additionally, input tax credits are not allowed on certain supplies. Let’s examine these supplies’ characteristics.
Products utilized in the production of exempt items
Under the VAT Act, certain supplies are declared exempt such as local passenger supplies, bare land supplies, etc. Registered businesses cannot recover the tax paid on the purchase of raw materials used in the manufacture of these exempt supplies.
Example: Fatima Transports in Dubai purchased 10 units of Project A for AED 1,000. VAT payable on purchase is 5%, or AED 500. Item A is exempt because it is used to provide local passenger service. Fatima Transports is therefore not entitled to recover the AED 500 paid for the purchase of Goods A as the amount was used to provide exempt services.
Entertainment services provided to non-employees
Registered companies cannot claim input tax refunds on entertainment services provided to non-employees. These non-employees include customers, potential customers, managers, shareholders, owners and investors.
Example: Ali Cars in Dubai purchased 10 cars from manufacturer Omar Cars in Dubai. Among the 10 cars purchased, one is used by the owner himself. In this case, Alibaba Auto cannot recover the input tax paid on the purchase of a car for personal use.
Purchase goods or services for employee use
A registered company cannot claim a refund of input tax paid on goods and services purchased by its employees. Employees do not pay for these products and services; they only do so for personal gain.
However, you can claim an input VAT refund for such goods and services if the following conditions are met:
There is a legal obligation to provide goods or services under applicable labor laws in the UAE or designated territory.
It is a contractual obligation or written policy for an employee to provide goods or services in the performance of his or her duties and can be proven to be normal business conduct in the course of employment.
If the supply of goods or services is deemed to be a supply;
Example: Alibaba Auto purchases fitness equipment for employees to use. The device is provided to employees free of charge as part of an employee benefits package. The VAT payable on the purchase of fitness equipment is AED 2,000. Alibaba Automobile is not entitled to claim an input tax refund on this purchase because the fitness equipment was purchased for employees.
Therefore, businesses registered for VAT in the UAE should be wary of these supplies as they will not be eligible to recover the input tax paid. It is important to charge input tax only on supplies that qualify for input tax credit.
You can also register for VAT Registration on our website:
https://www.vat-registration-uae.com/