Input VAT Credit - Foundation stone of Value Added Tax

Decree-Law on VAT in UAE and its Executive Regulations provide self-declared flow of credit in the supply-chain, from the producer to consumer. Input VAT credit is the foundation stone of Value Added Tax across the world. The term Input VAT or Input Tax has been defined under Article (1) of VAT Legislation as, Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import. The possibilities of Input VAT credit (recovery) is implied within the name of the tax itself which is “Value-Added Tax”. It is important to note that before claiming for any input VAT recovery, the eligibility of those expenses is to be validated first.

Conditions to be satisfied in order to claim Input VAT incurred on expenses:

1. Expenses must be an eligible one as defined
2. Tax Invoice relating to this expense has been received and kept
3. Tax Invoice to include details as specified explicitly under law
4. Value of consideration either has been paid or there is an intention to pay it within six months after the agreed date of payment for the supply

These compulsory four conditions bring out these two important elements about how to handle with utmost caution the process of Input VAT recovery:

[A] Explicit

1. Documentation is the key. Tax Invoice is that document which need to satisfy 10+ check list type conditions, to be a valid and eligible document for Input VAT claim.
2. Personal and non-business expenditure are not eligible for Input VAT claim

[B] Not so explicit

1. Supplier or Vendor either has been ‘paid’ or there is a time bound ‘intention’ to pay

Once all these four conditions have been satisfied, Input VAT can be recovered through the VAT Return filed for that point in Tax Period or at best, from the immediately succeeding Tax Period.

How to reclaim the input VAT on expenses if that has been missed to be claimed in first two respective tax periods?

There can be situations where one has missed to include an input VAT claim  in the VAT Return of the first two Tax Periods in which these four  conditions have been met. In those cases, a reclaim of such missed Input VAT can be made only through a ‘Voluntary Disclosure’ procedure in any subsequent period to amend the reported amounts of either of those two Tax Periods. The intention behind such an option is to help the businesses to amend any one-off errors and the specific scenarios where such an option can be availed.

Implications of payment for the expense not made within the prescribed time period

This can happen if the input VAT recovery has been claimed by a company relating to any unpaid invoice based on the ‘intention’ to pay the invoice within the prescribed time period of six months. In case of such non-payment within that period, the company has to reduce the input tax amount to the extent of the tax recovery already made, in the VAT Return of the next Tax Period after expiry of the six-month period. In case the same invoice is paid later, then the company can claim for Input VAT recovery then.

Impact on Financial Statements

Input VAT recovery mechanism is part of a company’s not only cash flow management but also liability mitigation. Delay in claiming it is a loss both in P&L and Cash Flow and wrongful claim is a liability including penalties.

VAT Implementation Completion Test

It is always recommended to obtain an expert opinion for any delay in claim or wrongful claim of Input VAT through VAT Return, not only to decide whether to opt for Voluntary Disclosure, Forego or adjustments in current Tax Period to ensure the eligibility to do such amendments, but to also consider for any update in the business processes to avoid such errors or omissions in the future.

Test of proper VAT Implementation is in the recovery of Input VAT as entitled to. Afterall, Input VAT is the digital cash!

Also Register for our Tax Workshop On: UAE Input Vat Credit - Your Digital Cash that is scheduled on 26th June 2021, Saturday | 10 AM - 1 PM UAE Time - Click Here

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