Ineligible Supplies for Input Tax Recovery under VAT in UAE

Tally Solutions | Updated on: August 25, 2022

Under VAT in UAE, registered businesses are eligible to recover the VAT paid on the purchase of goods and services used for business purposes. This is, of course, subject to the conditions discussed in our previous article. In addition, there are certain supplies on which input tax recovery is not allowed. Let us understand the nature of these supplies:

Supplies used to make exempt supplies

Certain supplies are declared as exempt in the VAT Law, such as supply of local passenger transport, supply of bare land, etc. A registered business cannot recover tax paid on purchase of inputs used to make these exempt supplies.

For example: Fatima Transports in Dubai purchases 10 units of Item A @ AED 1,000. VAT paid on the purchase @ 5% is AED 500. Item A was used to supply local passenger transport service, which is exempted. Hence, Fatima Transports will not be eligible to recover AED 500 paid on purchase of Item A, as it was used to supply an exempted service.

Entertainment services provided to non-employees

Registered businesses cannot claim input tax recovery on entertainment services provided to non-employees. These non-employees can include customers, potential customers, officials, shareholders, owners or investors.

Note that entertainment services include hospitality of any kind, including providing accommodation, food and drinks which are not provided in the normal course of a meeting and access to shows or events or trips provided for the purpose of pleasure or entertainment.

For example: Ali Automobiles provides 3 days accommodation to its client during their visit to the business premises. The hotel tariff for 3 days accommodation was AED 1,000, on which VAT @ 5%, amounting to AED 50 was paid by Ali Automobiles. Ali Automobiles is not eligible to recover input VAT recovery on this, as the service amounts to entertainment services provided to non-employees.

Note that catering and accommodation services provided by a transport service operator to non-employees will not be treated as entertainment service, such as an airline providing accommodation to passengers whose flight has been delayed.

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, then the tax paid on purchase, rent or lease of the motor vehicle cannot be 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.

A motor vehicle used in the business will not be treated as being available for personal use in the following cases:

It is a taxi licensed by a competent authority within UAE
It is registered and used for the purpose of an emergency vehicle, including by police, fire, ambulance or similar emergency service.
It is used in a vehicle renting business, where it is rented to a customer

For example: Ali Automobiles in Dubai purchases 10 cars from the manufacturer, Omar Cars, in Dubai. Out of the 10 cars purchased, 1 car was used by the owner for his personal use. In this case, Ali Automobiles cannot recover input tax paid on purchase of the 1 car used for personal use.

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 which no charge is paid by the employees and it is for their personal benefit.

However, input VAT recovery can be claimed on such goods and services in the following cases:

Where it is a legal obligation to provide the goods or services under an applicable labour law in UAE or the Designated Zone.
Where it is a contractual obligation or documented policy to provide the goods or services for the employees to perform their role and it can be proven to be a normal business practice in the course of employment.
Where the provision of goods or services is a deemed supply

For example: Ali Automobiles purchased gym equipment for use by its employees. The equipment is made available to employees as part of their employee benefits and is free of charge. VAT paid on purchase of the gym equipment is AED 2,000. Ali Automobiles is not eligible to claim input tax recovery on this purchase as the gym equipment is purchased for use by its employees.

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 that are eligible for input VAT recovery.