Have you considered VAT implications on labour accommodation yet?

Gaurav ShivhareGaurav Shivhare    11 May 2020
Have you considered VAT implications on labour accommodation yet?

Have you considered VAT implications on labour accommodation yet?

VAT implication on labour accommodation has always remained a debatable topic. The impact of VAT on labour accommodation is not as simple as it seems. Thus, overlooking the same may have serious consequences.

Moreover, Companies (employers) are generally not aware or they have not considered any VAT implications on labour accommodation provided. In this Article, I have covered possible VAT implications on labour accommodation provided by the employers and what one should examine/ analyze before finalizing the tax position on it.

Reference is drawn to the Real Estate VAT Guide | VATGRE1 issued by the FTA which states that :

Supply of accommodation in labour camps

Where an employer houses its staff in a labour camp which qualifies as residential accommodation, or any other type of residential accommodation, the employer must determine whether it is making an exempt supply of the residential building to its staff.

Where the employer charges the employee a form of consideration in exchange for the residential accommodation, this shall be treated as a supply for VAT purposes. The consideration received will either be zero-rated (in respect of the first supply of a residential building) or exempt from VAT. Consideration may be received from an employee in a number of ways, including but not limited to:

  • A direct charge made to the employee for the accommodation;
  • A deduction from the employee’s salary in respect of the accommodation; and
  • Provision of accommodation in lieu of the payment of a housing allowance to the employee.

Any costs which directly relate to the provision of that residential accommodation to the employee, for example agent’s fees, shall normally be treated as relating to an exempt supply and shall not be recoverable.

Where the employer does not make a charge to the employee for the provision of residential accommodation, it is not making a supply for VAT purposes. In such cases, any VAT incurred on costs relating to the provision of the residential accommodation may be recovered as a general overhead cost of the business.

Based on the above guidelines, below are general checkpoints that employers need to identify before finalizing tax position on labour accommodation –

1. Identify whether accommodation provided is a serviced accommodation (accommodation wherein additional services are provided such as telephone access, laundry services, catering, etc.) or a residential accommodation (accommodation wherein normal services are included such as security, utilities, etc.)

2. If labour accommodation is identified as residential accommodation,

i. Staff accommodation provided against which either there is a separate charge made to employee or there is a salary deduction: - As stated in the above guideline, such residential accommodation would be treated as exempt supply for the purpose of VAT. Employers should ensure that salary deduction/ separate charge is appropriately disclosed as exempt supply in the VAT return and any input tax towards exempt supply is not recovered.

ii. Staff accommodation provided instead of paying housing allowance (‘HRA’) to employee: - This is the most important aspect which needs detailed analysis from VAT perspective.

  • Firstly, it is not prescribed which document is required to be referred for determining whether accommodation is provided instead of HRA. Whether Company’s internal job offer/ employment contract needs to be considered or employment contract registered with Ministry of Human Resources & Emiratisation (‘HR Ministry’) is required to be considered.
  • Moreover, in most of the employment contracts registered with HR Ministry, the word ‘First Party’ is stated against Housing Allowance. Does it mean that Company has provided accommodation instead of paying HRA?

    Therefore, it is advisable to seek clarification from the FTA and confirm which document should be considered for determining whether employer is making any exempt supplies.

iii. Staff accommodation provided without charging or deducting any amount from employee’s salary: - As there is no charge to the employee nor there is deduction from employee’s salary, employer would be treated as not making any supply for VAT purposes. Accordingly, there is no disclosure requirement and any input tax against such accommodation may be recoverable.

3. If labour accommodation is identified as serviced accommodation,

i. Staff accommodation provided against which either there is a separate charge made to employee or there is a salary deduction: - Provision of serviced accommodation against salary deduction/ direct charge may be treated as taxable supply wherein salary deduction/ direct charge would be treated as consideration for the purpose of VAT. Thus, employer is required to disclose the given transaction as standard rated supplies and pay VAT. Further, employer can recover any input tax incurred towards such serviced accommodation.

ii. Staff accommodation provided instead of paying HRA to employee: - As stated in Para 2. ii. above, taxability would depend on which document is required to be referred i.e., Company’s internal offer letter or employment contract registered with HR Ministry. Hence, clarification should be obtained from the FTA before finalizing tax position. If it is concluded that accommodation is provided instead of paying HRA, transaction may be treated as taxable supply for the purpose of VAT.

iii. Staff accommodation provided without charging or deducting any amount from employee’s salary: - As employer is providing serviced accommodation without charging any additional consideration to employees, it needs to be assessed whether such provision would be treated as deemed supply under VAT [Article (11) of VAT Decree Law].

4. Reference is also drawn to Ministerial Resolution No. (591) of 2016 Concerning the Commitment of Establishments to Provide Accommodation to their Workers which states that it is compulsory for employers to provide accommodation to workers wherein number of employees are 50 or more and total wage of each worker is less than AED 2000. Based on the given resolution, can a position be taken that there may not be any VAT implication on accommodation provided in cases where Company has more than 50 employees and salary of each employee is less than AED 2000?

All in all, I would like to urge businesses to carefully consider the checkpoints stated above before freezing tax position on labour accommodation provided. Additionally, if it is not clear then advisable to file Clarification and get it confirmed from the FTA.

Note – ‘Labour’ and ‘employee’ is used interchangeably in this Article.

 

Gaurav Shivhare | Chartered Accountant – England & Wales and India | WTS Dhruva Consultants | +971564030888

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax. 

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