All You Need To Know about Input Vat Credit

September 25, 2020Dated:  | |

The two main terms used while filing any return is Input VAT & Output VAT.

Input VAT is VAT paid over purchase of goods or services.
Output VAT is VAT which shall be collected by the seller when supplies of goods or services are made…

While filling the VAT Return, the amount paid as input VAT can be offset against any output tax payable. The primary condition to recover this tax depends to the extent that it relates to taxable supplies made by them.

Conditions for Input Tax Recovery:

All the below mentioned condition shall be satisfied to in order for Input VAT to be recoverable:

  • Recipient must be a Taxable Person (i.e. Registered for VAT).
  • While considering it as a recoverable tax in the VAT period, such input VAT shall be paid or there should be an intention to be paid within 6 months.

If the only a part of the amount is paid, the recipient can only seek to recover VAT related to that proportion.

  • The recipient should be in possession of Tax Invoice for the same.
  • The goods or services for which the expense is incurred shall be for the eligible purpose.
  • The VAT shall be charged correctly by the supplier.
  • The VAT amount must not be specifically blocked from recovery.

Input VAT Apportionment:

As discussed earlier, VAT paid on expenses or purchases can only be recovered to the extent that it relates to eligible supplies.

Where a business makes both eligible taxable and ineligible non-taxable supplies, it has to identify how much of the VAT that it has incurred can be recovered.

A business must apply the below 4 steps to assess the amount of recoverable input tax:

  • Input tax that wholly relates to eligible supplies can be recovered in full.
  • Input tax that wholly relates to non-taxable (i.e. exempt or non-business) supplies which cannot be recovered.
  • Input tax that relates to both eligible and non-taxable supplies must be apportioned.
This apportionment is determined using a below calculation:

Value of input tax that relates to eligible supplies.

Value of input tax that relates to both eligible and ineligible supplies

This percentage is rounded to the nearest whole number and multiplied by the relevant input tax amount. The answer is the recoverable amount of input tax.

  • Add together the result of steps 1 and 3 to get the total recoverable input tax.

Pre-registration input tax: Can it be recovered?

There might be scenarios where a business has incorporated and incurred several taxable expenses or purchases and registered for VAT upon reaching the threshold limit afterwards.

Input VAT incurred prior to your VAT registration date can be recovered provided it meets all of the “Conditions for VAT Recovery” as mentioned above and was incurred on any of the following types of supplies:

  • Supplies of goods that were acquired before, and remained within the UAE at, your VAT registration date. Where the goods are Capital Assets, this only relates to the value which has not depreciated at the date of registration;
  • Imports of goods that were acquired before, and remained within the UAE at, your VAT registration date; and
  • Supplies of services that were received no more than 5 years before your VAT registration date.

This is provided the goods or services were used by the taxable person to make taxable supplies.
Pre-registration input tax should be recovered on the tax return for the first tax period following your VAT registration date.

Excess recoverable input tax

A taxable person will have excess recoverable input tax if:
(i) the recoverable input tax amount exceeds the output tax payable to the FTA in a tax period; or
(ii) if the amount of tax paid over to the FTA exceeds the amount that you were liable to pay.

A taxable person may carry forward excess recoverable input tax to the next tax period and offset against any payable tax or administrative penalties imposed.

However, it is not required that the excess recoverable input tax must be carried forward to subsequent tax periods, as Federal Law No. 7 of 2017 on Tax Procedures allows the taxable person to apply to the FTA for a refund of tax paid where it exceeds the value of payable tax and any administrative penalties due from the taxable person (where applicable).

Input tax adjustment: Post-recovery

Adjustments to input tax recovery are required where the actual use of input tax differs to the way in which you expected input tax to be used at the time you recovered it.

This is referred to as a “change in use” and can occur in 3 situations:

  • If you expected to use the goods or services for making taxable supplies (and so recovered that input tax) but it was actually used for making non-taxable supplies – the amount of over-recovered input tax must be repaid to the FTA;
  • If you expected to use the goods or services for making non-taxable supplies (and so did not recover that input tax) but it was actually used for making taxable supplies – the amount of under-recovered input tax can be recovered; and/or
  • If you expected to use the goods or services for making both taxable and non-taxable supplies (and so you apportioned and recovered part of that input tax) but the proportion of taxable and non-taxable supplies changed – this may result in an over- or under-recovery of input tax.

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