Input tax recovery under VAT in UAE

The Value Added Tax (VAT) system implemented in the United Arab Emirates (UAE) in 2018 plays a crucial role in government revenue generation. Businesses registered under VAT must charge VAT on their taxable supplies (sales) at the standard rate of 5%. However, to ensure a fair and balanced system, the UAE VAT framework allows for the recovery of VAT incurred on business purchases, known as input tax recovery. This mechanism helps businesses claim back the VAT paid on expenses related to their taxable supplies, effectively reducing their overall VAT liability. This article provides comprehensive information regarding Input tax recovery under VAT in UAE.

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Who is Eligible for Input Tax Recovery?

Not all businesses in the UAE can claim input tax recovery. Eligibility is restricted to entities registered for VAT purposes. Here are the key requirements for VAT registration:

• Annual Supplies Exceed VAT Threshold: Businesses exceeding a specific threshold of taxable supplies in the preceding 12 months (currently AED 375,000) must register for VAT. Voluntary registration is also an option for businesses below the threshold.

• Taxable Supplies: Businesses primarily supplying taxable goods and services are eligible for VAT registration. While some supplies are exempt from VAT, most goods and services fall under the taxable category.

Important Note: Under specific circumstances, non-residents supplying goods or services electronically to UAE consumers might also be required to register for VAT.

Benefits of Input Tax Recovery for Businesses

The ability to recover input tax offers several advantages for businesses registered under the UAE VAT system:

• Reduced Cash Flow Burden: By recovering VAT paid on eligible expenses, businesses can significantly reduce their overall VAT liability, improving cash flow and working capital management.

• Competitive Pricing: Reclaiming input tax allows businesses to offer more competitive pricing to their customers, as the effective VAT cost on taxable supplies is minimized.

• Fair and Balanced System: Input tax recovery ensures businesses are not subject to double taxation on the value they add to goods and services. They only pay VAT on the final value they create, not on the VAT already paid on purchases.

Documents Required for Input Tax Recovery

Businesses must maintain proper documentation for all VAT-related transactions to claim input tax recovery. Here are the essential documents:

• Tax Invoices: Original or certified copies of tax invoices issued by VAT-registered suppliers for purchases related to taxable supplies. These invoices must contain specific details, including the supplier's Tax Registration Number (TRN), description of goods or services, VAT amount charged, and total invoice value.
• Import Documents: Customs duty declarations or other import documentation for VAT-paid imports used for taxable supplies.
• Internal Records: Maintain proper accounting records to track purchases, input tax claims, and taxable supplies made.
• Electronic Records: The Federal Tax Authority (FTA) encourages maintaining electronic records to ensure efficient tax compliance and claim processing.

Conditions for Input Tax Recovery

Registered businesses in the UAE can recover the VAT paid to purchase goods and services for business purposes. But, your business should meet the following conditions to recover input VAT,

Should be utilized to make Taxable Supplies:

Taxable supplies are goods or services a registered business sells subject to Value Added Tax (VAT). This typically incurs a standard 5% VAT charge. You must produce taxable supplies as per the UAE government to claim input VAT. It's important to note that there's a distinction between taxable and exempt supplies, where the latter are not subject to VAT.

Should have Valid Tax Invoices:

Businesses need to possess valid tax invoices with the following details for claiming input tax recovery:

• Supplier's Tax Registration Number (TRN):  This verifies the supplier's VAT registration status.

• Description of Goods or Services:  A clear description of the purchased goods or services.

• VAT Amount Charged:  The specific amount of VAT charged by the supplier.

• Total Invoice Value:  The total cost of the purchase, including VAT.

• Missing Information or Non-VAT Registered Suppliers:  Invoices issued by non-VAT registered suppliers or those with missing information are unacceptable for input tax recovery purposes.

Recipient Receives and Keeps the Tax Invoice:

The business claiming input tax recovery on a supply must ensure it receives and retains a proper tax invoice for its records. This invoice should explicitly mention the supply details and the claimed input tax.

Payment of Consideration for the Supply:

The business claiming input tax recovery should pay or intend to pay the consideration (payment) for the supply within six months from the agreed date of payment for the supply. This ensures the business has incurred the expense and is not claiming recovery for a potential future purchase.

Types of Input Tax Recoverable

Under the UAE VAT system, businesses can generally recover input tax incurred on a broad range of expenses if they meet the conditions outlined above. Here are some common examples:

• Purchases of Goods and Services: VAT paid on purchases of raw materials, equipment, office supplies, utilities, advertising, marketing, maintenance services, and other business-related expenses used for taxable supplies.

• Import VAT: VAT paid on imported goods used for taxable supplies.

• Travel and Entertainment Expenses: Input tax on travel and entertainment expenses incurred for business purposes might be partially recoverable under specific regulations.

Important Note: Businesses should refer to the official FTA guidelines or consult a Filings.ae experts to distinguish between the taxable supplies of your business from exempt supplies (if there is any).

How to Claim Input Tax Recovery in the UAE? 

Registered businesses in the UAE can claim input tax recovery through the following steps:

1. Maintain Accurate Records: Throughout the tax period, meticulously maintain accounting records for all purchases, including tax invoices and import documents. Ensure these documents comply with the aforementioned requirements.

2. Calculate Input Tax: Based on the tax invoices and import documents, calculate the total input tax incurred on eligible purchases.

3. File VAT Return: The UAE VAT return, typically filed electronically through the FTA's online portal, allows businesses to claim input tax recovery. Enter the total input tax amount and any relevant apportionment calculations within the designated section of the VAT return.

4. Offsetting VAT Liability: The claimed input tax amount is then offset against the total output VAT (VAT collected on sales) during the tax period. The resulting amount determines the net VAT payable to the FTA or the refundable amount.

5. Retention Period: Businesses must retain all VAT-related documents for at least five years from the tax return filing date. This ensures proper audit trails and facilitates compliance checks by the FTA.

Conclusion

Understanding input tax recovery under the UAE VAT system is essential for businesses to optimize their cash flow, maintain competitiveness, and ensure compliance. This comprehensive guide has explained the eligibility criteria, necessary documents, conditions for recovery, claiming procedures, and benefits associated with input tax recovery. By carefully managing VAT obligations and using the available mechanisms, businesses can operate efficiently and thrive in the UAE's dynamic business environment.

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