List of business expenses on which input VAT is blocked

Tally Solutions | Updated on: December 30, 2021


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:

  • Entertainment expenses
  • Motor vehicles used for personal purposes
  • Employee related expenses

Let us understand these in detail.

Entertainment Expenses

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.

Motor vehicles used for personal purposes

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:

  • a taxi licensed by a competent authority
  • a motor vehicle registered as, and used as an emergency vehicle, including by the police, fire brigade, paramedics, or similar emergency services and
  • a vehicle which is used in a vehicle rental business where it is rented to a customer

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:

  • Where the employer has a legal obligation to provide those goods or services to the employees under any applicable UAE labour law.
  • Where it is a contractual obligation or documented policy of the employer to provide those goods or services to employees, to enable them to perform their role, and where it can be proven to be normal business practice to do so in the course of employment
    For example: In the employment contract of call centre employees, it is promised that conveyance to and from the office will be given, for late night shifts. Here, as this is a contractual obligation to the employees, the organisation can recover the VAT paid on the conveyance expenses.

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 .

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