How do you deal with VAT on expenses like mobile phones, airtime, and data packages made available to employees?

WHY IS THE TOPIC RELEVANT?

The amount of VAT spent on expenses like mobile phones and data packages made available to employees is a recurring and one of the important expenses for most businesses in the UAE. Also, due to COVID 19, there has been an increase in work-from-home arrangements increasing the scope of such expenses. There existed uncertainty regarding availing of Input Tax Credit on them.

WHY DID THE UNCERTAINTY EXIST?

There is potential private use of such Phones, Airtime, and Packages by the employees. And it resulted in ambiguity if the businesses are entitled to recover the Input Tax Credit or not.

BACKGROUND AND REFERENCE TO LAW

Article 53(1)(c) of the Executive Regulation prohibits the recovery of Input Tax incurred on goods or services purchased to be used by an employee for their personal benefit without any charge to the employee, unless there is a legal or contractual obligation on the employer to provide such service for the employee to perform their role, or it is a deemed supply.

However, Article 53(1)(c) of the Executive Regulation does not apply where a taxable person can prove that the goods or services are used solely for business purposes.

THE PUBLIC CLARIFICATION

The Federal Tax Authority (FTA) published a VAT Public Clarification (VATP028) to guide the application of the VAT legislation concerning the recovery of input tax incurred on phones, airtime, and packages acquired for business use. 

According to the Public Clarification, where an employer acquires phones or telecommunication services for use by its employees solely for business purposes and has a strict policy to restrict their use for business purposes, the right to use the devices and telecommunication services would not constitute a personal benefit for the employee, provided its value was determined based on actual historical business usage.

The Public Clarification further clarifies that a business is entitled to recover input VAT on such expenses if these costs are incurred to make taxable supplies and all the following conditions are met:

• The business is registered for VAT and acquired Phones, Airtime, or Packages services in its own name;
• The business has a documented policy in place which clearly states that the Phones, Airtime, and Packages may only be used for business purposes and the consequences of any personal use;
• The business regularly monitors the use of Airtime and Packages and retains justification for the variances;
• The business takes action against employees using Phones, Airtime, and Packages for personal use in accordance with the documented policy; and
• The business retains valid tax invoices in respect of the Phones, Airtime, and Packages acquired.

The Public Clarification puts its emphasis on the fact that only documented policies that were already in place at the time the Phones, Airtime, and Packages were made available to the employee will be considered.

Note: If any of the above five conditions are not met, the recovery of input VAT incurred will be blocked.

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