Non-Recoverable Input VAT

All businesses in the United Arab Emirates pay input VAT on purchasing taxable goods and services. Input tax may be recoverable wherein the Federal Tax Authority (FTA) in UAE refunds the tax amount to the business or is non-recoverable wherein the firm does not receive refunds of the input tax payments. 

There is an element of confusion concerning non-recoverable input VAT on entertainment services. Hence, businesses in the UAE are unsure of what to do when claiming the same.

This post clarifies the FTA’s stand on non-recoverable input VAT in the UAE.

FTAs Public Clarification VATP005 Concerning the Non-recoverable Input VAT 

The FTAs directives in Article 53(1) of Cabinet Decision No. (52) of 2017 concerning non-recoverable input VAT in the Executive Regulations of the Federal Decree-Law No (8) on Value Added Tax (“the Executive Regulations”) are as follows:

• All businesses in the UAE other than Government concerns who provide entertainment services to anyone who is not their employee must bear it themselves. The FTA will not refund the same.
• However, if the company offers entertainment services to non-employees, the input VAT incurred as an incidental business expenditure (such as refreshment during AGMs) becomes a recoverable input VAT. 
• Please note that the input VAT incur during a hospitable service to a non-employee that is not for business purposes is non-recoverable input VAT.

Hence the VAT incurred in providing entertainment services to the company’s investors or prospective buyers is a non-recoverable input VAT tax but recoverable if the business can declare it to be a necessary expense for the business purposes.

Nevertheless, suppose the provision of entertainment services is by a Government company in the UAE; for instance, for refreshments served during meetings with dignitaries from a foreign country, the VAT tax incurred on entertainment services becomes recoverable input VAT. 

Please note that the same becomes non-recoverable input VAT for non-Government businesses.

Is VAT on Entertainment Services To Employees Refundable?

As per the directives of the FTA concerning the recoverability of input VAT on entertainment services to employees, it is refundable only if it adheres to the following criterion:

• The business entity provides the service or goods to its employees as a requirement under the labor law in UAE or designated Zones (DZ) 

For instance, if the employee is new to the place, he will need an accommodation to perform his duties as an employee. 

Providing such an accommodation until the employee finds a place of his own is a recoverable input VAT expense. However, the refreshments provided to the employees are non-recoverable input VAT.

• If the Decree-law obligates the business to provide the service to its employees
• If the company policy or the employment contract states that the supply of goods or services is for business purposes and necessary for the employee to discharge his duties.

The above exceptions apply to both Government and non-Government business organizations. 

Conclusion

There is an acceptable difference between entertainment services that are recoverable and non-recoverable input VAT, which is confusing for businesses in the UAE. Use this guide on the FTA public clarification to help you understand your recoverable input tax and include the same in your returns.

VAT compliances can be challenging to understand. Allow Flyingcolour experts to guide you in knowing your recoverable and non-recoverable input tax to file accurate returns.