Is the Input VAT paid prior to Registration, claimable?

Introduction

In UAE, mandatory VAT registration is required only for those businesses whose value of supplies exceeds AED 375,000 in previous 12 months or anticipated to exceed in next 30 days during the current financial year. For businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year, the VAT registration is optional.

All those businesses whose value of supplies are less than the defined threshold limit will not be allowed to register under UAE VAT. However, this does not stop or restrict them to obtain VAT registration in the future, when the value of supplies exceeds or is anticipated to exceed the defined VAT registration threshold. This eventually leads to a business situation, in which, businesses were not registered on the 1st January, 2018, the date on which VAT was implemented but over the period of time, they have exceeded the defined threshold and have been registered under UAE VAT.

If you take a close look at the above situation, there are two phases to the journey of the businesses, Pre-Registration and Post-registration. In pre-VAT registration phase, they had to pay VAT on their purchase/expenses but were unable to recover Input VAT. This is because, only the registered business are allowed to recover Input VAT. In the post-registration phase, they are required to collect 5% VAT on taxable supplies and also, they are allowed to recover the Input VAT paid on purchases/expenses.

While the above discussion looks clear, the confusion is about reclaiming the Input VAT paid before registration? Are businesses allowed to recover the VAT paid before VAT registration?

Yes, the UAE VAT laws allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration. This will be allowed, only if the goods and services were used to make supplies that give the right to input tax recovery upon tax registration. This implies that the purchases / expenses on which VAT was paid before registration were used in making taxable supplies after registration.

The recovery of Input VAT will be in accordance with the general provisions of input TAX recovery and more importantly, the recovery should be done in the VAT Return submitted for the first Tax Period following Tax Registration.

However, the UAE VAT also stipulates certain exceptional scenarios in which VAT paid before registration cannot be recovered. The following are the instances:

• Goods and Services purchased for the purpose of making non-taxable Supplies. This implies that, you can recover VAT, only if it is used for making taxable supplies including zero-rated supplies.
• Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration. This implies that If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated. For example, if you purchase a fixed asset with an expected life of 10 years and when you register for VAT the asset has only 3 years of use left. In this case, you can reclaim only 30% of the VAT you originally paid.
• Input VAT on service received more than 5 years prior to the date of tax registration will not be allowed to be reclaimed. This restriction is applicable only for services and not applicable for goods.
• If such goods were moved to another GCC country before tax registration.

Except for the instances listed above, in all other cases, you will be eligible to recover VAT paid before registration, if it is used for making the taxable supply.