Time Frame for Input VAT Recovery

FTA has just published an important clarification on Time Frame for recovering Input Tax on Supplier / Vendor / Purchases / Expenses Invoices.

This is a significant clarification of ‘subsequent tax period’ which has led to numerous interpretations in last 30 months and may be some uncalled-for Voluntary Disclosures by companies.

Summary and Key Highlights:

1. Input tax must be recovered in the first tax period in which:

               a. Tax Invoice is received and

               b. intention to make the payment of consideration is formed

                      These two conditions to be met cumulatively

For instance, a taxable person may receive a Tax Invoice in one tax period but may not have an intention to make the payment until the internal approval process for the invoice is completed. So, taxable person may recover the input VAT in the later tax period in which the internal approval process is completed. This ‘intention’ needs to be substantiated

2.     If the input tax is not recovered in the tax period in which both these conditions are satisfied, the taxable person can recover the input tax in the immediate next tax period.

3.     If input tax is not recovered in the first two tax periods (read, 1st tax period when both the conditions have been satisfied for the first time and tax period following that), a taxable person is required to submit a voluntary disclosure (subject of course to the existing Tax Procedure Rule of ‘Payable tax’ being less than AED 10,000 or more, each tax period).

4.     If the payment towards the invoice is not made to the vendor/supplier within six months after the agreed date of payment, the taxable person needs to reduce the input tax in the VAT Return of the tax period following the expiry of the six-month period. However, once the payment is made, the taxable person is entitled to recover the input tax in the tax period in which such payment is made.

Observations & Tips:

1. Companies which have expensed out input VAT in the past simply due to late receipt of supplier invoices beyond two tax periods, may re-visit their position. It would be worth the effort to examine if such expensed out input tax in the past can be recovered now with this new clarification. This of course will be subject to necessary documentation in place.
2. Input VAT Credit is hard cash. To substantiate ‘intention to make payment’, a company may need to record this in a process & procedure document [SOP]. This will then serve as an evidence.
3. Payment terms of vendor/suppliers need to be revisited and amended, if required, to give enough time for Input VAT Credit based on empirical study of payment pattern of the past 24 months.
4. Like Debtors’ Ageing Analysis Report, Vendor payment ageing report need to be maintained and analyzed to ensure adherence to the “six-month payment condition after the ‘agreed date of payment’ condition.”

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