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Every business has certain common business expenses which are incurred on a day to day basis. With the introduction of VAT in UAE, certain types of expenses are such that input tax recovery is not allowed on them. It is important for businesses to recognise these common business expenses and ensure that input tax is not recovered on these. In this article, let us understand these common business expenses on which input VAT recovery is not allowed under VAT in UAE.
The expenses on which input VAT recovery is blocked can be categorised into 3 broad categories:
Let us understand these in detail.
Businesses registered under VAT are not allowed to recover input tax on expenses incurred for providing entertainment to anyone not employed by the business , including customers, potential customers, officials, shareholders, owners, and investors in the business.
The type of entertainment expenses which are not allowed for input VAT recovery include hospitality (For example: Accommodation, food and drinks) which are not provided in the normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.
When a business incurs any such expense, it will not be able to recover the VAT incurred on these expenses.
Typically, a person registered under VAT is allowed to recover VAT incurred on the purchase, lease or rental of a motor vehicle which is used for their business activities. However, where the motor vehicle is available for the personal use of any person in the business, the registrant will lose the right to recover the VAT incurred on the purchase, lease or rental of the motor vehicle.
Here, a 'motor vehicle' is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including the driver. 'Motor vehicle' does not include a truck, forklift, hoist or other similar vehicles. This rule ensures that the VAT incurred on essentially commercial vehicles is not blocked due to incidental private use.
A motor vehicle will not be treated as being available for private use if it is within any of the following categories:
Certain expenses incurred by a business for the purpose of their employees are not allowed for input tax recovery. VAT paid on employee-related expenses will not be recoverable by the business where the goods or services are purchased to be used by employees for no charge to them and for their personal benefit.
There are, however, certain exceptions from the above rule. The above rule will not apply in the following situations:
Hence, businesses should note these expenses on which input VAT recovery is blocked. Further, it is important to note that the basic conditions for input tax recovery need to be satisfied, for input tax recovery to be allowed on any type of business purchases. The conditions for input tax recovery are listed in our article Input tax recovery under VAT in UAE .