VAT Case Study: Separate Pricing Causes Composite Supply Claim to Be Invalid

VAT Case Study: Separate Pricing Causes Composite Supply Claim to Be Invalid

Disclaimer: The company names and details mentioned in this case study are fictional and have been created solely for illustrative and educational purposes. Any resemblance to real entities is purely coincidental.

This is a case study which is focusing on a hospitality group that applied incorrect composite supply rules, which led to VAT reassessment by the Federal Tax Authority(FTA). There are possibilities to cause confusion when it comes to UAE VAT law for any business that offers bundled packages or services, which means the composite and the mixed supply

 Background of the Company

Company Name: Oasis Hospitality Group LLC

Location: Abu Dhabi

Activity: Event management and corporate hospitality packages

Annual Revenue: AED 12.5 million

VAT Registration: Active since 2018

For any corporate clients, Oasis used to provide packages that include entertainment, catering services, decor services, and event space rental. Even though these services had itemised pricing, they used to be advertised as a single "event package."
 

Objective

The business management had certain beliefs such as:

• The entire supply can be treated as a composite supply with a single VAT treatment; all package components were considered as supporting the primary service (event hosting).
• The company should charge 5% VAT on the entire package value.

Legal Reference: Article 4 - Supply Classification

As per the executive regulation, Article 4 of the UAE VAT law, a composite supply is defined as follows:
Any supply consist of one or more component and one of them serving as the principal component then VAT treatment of entire supply depends on how it is priced. If each component is priced individually, then the VAT should also be treated individually. If all the components are bundled naturally, then the pricing should not be separate; it should also be bundled.

The services which are contracted or priced separately are considered mixed supplies and must be treated individually for VAT purposes.

• For Oasis what went wrong was, they had separate pricing on the invoices but in terms of VAT they treated all the services as a standard rated and invoiced the clients rather treating individually for venue (standard-rated), catering (standard-rated), entertainment (standard-rated), and outsourced decor (zero-rated per supplier status).
• They considered the entire transaction as a composite supply and continued invoicing.
• During the FTA audit, they discovered the irregularities in the VAT treatment on the invoices submitted.

FTA Audit Findings

During the FTA audit, each component on the invoice had certain prices and was clearly separated so that the clients of OASIS had options whether to choose the specific services or not. Due to which FTA has mentioned that Oasis has failed the inseparability test that is necessary for composite materials. FTA has also rejected the claim for composite supply due to this.
FTA stated that each components need its own VAT treatment, and the outsourced decor zero rating was also rejected since it was packaged incorrectly.

 Financial Impact

* Oasis has not paid an amount of AED 12,000 as per the actual VAT treatment as per FTA due to the wrong classification.
* Incurred an administrative penalty for wrong return filing.
* FTA has asked to amend the returns and issue the correct tax invoices.
 Lessons Learned
* The composite supply purely dependents on the perception and billing which means for different supply the pricing should also be different.
* Bundling will eliminate the ability of client's to select or exclude items: Customization provides the flexibility hence breaks the composite status.
* FTA only looks at the structure of contracts and the invoices: not the promotional items mentioned.
* Access to zero-rating or exemptions can or may be denied due to careless treatment of VAT.

Corrective Action
1. Oasis Hospitality has applied for a voluntary disclosure for the relevant tax periods and reissued previous invoices with the proper VAT treatment.
2. The service contracts were corrected in accordance to VAT treatments highlighted by FTA.
3. Prepared an internal policy which outlines the terms and conditions of bundling the upcoming events.

 Compliance Recommendations
* Need to identify whether the bundled offerings satisfy the composite supply criteria.
* If the service is inseparable then only mention single price.
* When it comes to separable services then the pricing and VAT should be divided accordingly.
* Proper documentation has to made proving the client received a single, bundled supply.
 How Flying Colour Can Help
We help businesses with the following: 
* Accurately classifying supplies as mixed or composite.
* Updating pricing policies and invoice templates.
* Performing compliance health checks prior to FTA audits.
* If necessary, filing VAT corrections via EmaraTax portal.
 

To learn more about VAT Case Study: Separate Pricing Causes Composite Supply Claim to Be Invalid, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.