VAT Recovery of Business Expenses

Anshika AgrawalAnshika Agrawal    20 November 2019
VAT Recovery of Business Expenses

As per Article 54 of Federal Decree Law No (8) of 2017, most of the expenses incurred by the businesses during the course of business are eligible to be recovered as input tax, however there are few exceptions/limitations with regard to certain expenses where input tax credit is not allowed:

1. Food and drinks provided to the customer:

A non-extravagant lunch and drinks delivered to the office and consumed during the course of business meeting will be allowed for VAT recover. However taking a customer out for lunch or for entertainment will not be eligible for VAT recovery.

2. Entertainment Expenses:

VAT registered businesses cannot claim a refund of input VAT paid on any expense related to entertainment for anyone other than the company employee, including business customers, clients, officials, owners, shareholders and/or investors.

The entertainment expenses not eligible for input tax recovery are:

  • Hospitality, such as accommodation, drinks and food, not provided during a meeting
  • Trips for pleasure or entertainment
  • Shows or events

3. Telephone or Electricity expenses paid on behalf of directors or CEO of the company:

VAT incurred on the expenses paid by business on behalf of personal expenses of directors or CEO cannot be claimed as input VAT.

4. Motor Vehicles used for personal use:

If a registered business has purchased/rented or leased motor vehicles for use in the business but it was used for personal use by a person in the business, tax paid on such motor vehicle is not recovered.

Note that here, motor vehicle means a road vehicle designed or adapted for the conveyance of not more than 10 people, including the driver. Trucks, forklifts, hoists or similar vehicles are not included.

5. Goods or services purchased for use by employees:

Registered businesses cannot claim input tax recovery paid on goods and services purchased for use by employees, for whom no charge is paid by the employees and it is for their personal benefit.

For example gym equipment purchased for use by employees free of charge as a part of their employee benefits. VAT paid on purchase of gym equipment is not recoverable.

Hence, businesses registered under VAT in UAE should make careful note of these supplies on which they will not be eligible to recover the input tax paid. It is important that input tax is recovered only on supplies which are eligible for input VAT recovery.

6. Petrol expenses:

VAT incurred on petrol expenses incurred for supply or delivery of goods to the customer place can be fully claimed as input VAT recovery. However if it is used for both personal and business purpose, it should be tracked and apportioned correctly for the input VAT recovery as only ncurred for business purpose will be allowed.

VAT is fully recovered on the below expenses:

7. Conveyance expenses:

As per employment contract if conveyance to and from office is provided by the company, VAT paid on conveyance expenses can be fully recovered. This is because as a part of the contract of the employer, these services enable the employee to perform their roles and duties in normal course of employment.

8. Expenses incurred on providing Visa to employees:

5% VAT incurred by businesses on providing visa to their expat employees will be allowed to recover the input VAT on such expenses. This is because the cost incurred by the business will enable the employees to perform their duties in normal course of business.

9. Medical insurance expenses:

Businesses in UAE provide health insurance to their employees and incur 5% VAT on cost of insurance. This is fully allowed to be recovered as this is a legal obligation of the employer as per UAE labour law.

10. Legal consultation expenses incurred:

If a business has incurred VAT on the legal and professional fee paid for periodically receiving a legal consultation service from a law firm. Though the legal services are not directly related to the supply of gods, still the VAT paid on them is fully recovered.

Therefore it is not necessary to link every purchase with the outward supply in the business. Some purchases are consumed by business in day to day running rather than being supplied.

11. Capital expenditure incurred by service industry:

A tax consultancy firm engaged in the supply of taxable services purchases new furniture for office for tier employees. VAT paid on purchase of furniture will be fully recovered by the firm since the furniture will be used by the firm for the purpose of conducting their taxable activities.

Conclusion:

The key to determine if VAT is reclaimed on particular expense or not is that:

1) The amount of expense incurred is reasonable, it should not be extravagant.
2) It is for business purpose and it enables its employees to perform their duties and it is normal business practice
3) It is the purpose of conducting taxable activities.

 

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