Non- recoverable Input Tax – Entertainment Services

May 25, 2022Dated:  | |

All businesses in the UAE must impose VAT on all taxable supplies. However, the full extent of their tax liability depends on input tax and output tax. While input tax is the total tax amount that a business pays when it buys or imports goods and services, output tax is the total tax liability it pays to the suppliers of taxable goods and services. 

In other words, input taxes are a part of the daily business expenses and are generally recoverable. However, there are a few non-recoverable input taxes like entertainment services.

This article explains the non-recoverable input tax on entertainment services per the Federal Tax Authority’s (FTA) public clarification concerning UAE VAT.

Entertainment Services As the Executive Regulation

Article (53) (2) (a) of the Executive Regulation describes the non-recoverable input tax and entertainment services as:

  1. The hospitality that a business provides in the form of food, accommodation, or drink, is not a regular practice of the firm.
  2. Entertainment expenses also include pleasure trips or tours and tickets to events or shows.

However, if the company runs a travel business and offers food or accommodation to its customer for unavoidable delays, the law cannot consider it an entertainment service.

Recoverable and Non-Recoverable Input Taxes

VAT registered business houses can recover input taxes on the incurring expenses relating to providing entertainment services to anyone other than their employees.  

The company can recover input taxes on the money spent towards catering charges for the conference and business-related events provided it (the company) collects VAT from those who attend it. 

Some of the entertainment expenses, such as the flowers to decorate the reception area, small snacks or chocolates served at meetings, and beverages such as tea or coffee always available in the office, are recoverable expenses.

A company can also recover the expenses for serving inexpensive snacks in the workplace or a simple lunch during meetings. Still, it cannot recover the cost of hosting an Iftar or any other party, event of musical nature or motivational talks, or lavish dinners.

However, if the company incurs expenses while serving existing or potential customers, shareholders, investors, or business owners, the entertainment expenses are non-recoverable.

Gifts Recoverable or Non-Recoverable Entertainment Service?

A gift is taxable and a non-recoverable entertainment service when,

  1. The company spends more than AED 500 on gifts to any employee within a year; the law treats it as a taxable expense because it is a deemed supply. Hence Non-recoverable.
  2. If the company gifts its employee for Eid or any other festival or occasion such as retirement, birthday or weddings, or in honor of his achievements by giving him an award like the employee of the month, the expense for tax purposes is non-recoverable.

Conclusion

To summarize, the daily expenses in the procurement of taxable supplies of a business house become non-recoverable when they offer entertainment services to any individual other than a Government official, including their employees, investors, existing or prospective customers, and shareholders.

Our VAT tax experts offer you customized professional services to help with all compliance concerning UAE VAT to differentiate between your recoverable and irrecoverable expenses.

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