How to Identify Reclaimable VAT Expenses in UAE
The process of reclaiming VAT expenses or input VAT recovery is one of the crucial aspects in the VAT governance of an entity which can have substantial impact on the cash flows and working capital of the business. Understanding the various elements with respect to reclaiming VAT expenses will give an awareness on the internal controls over the administration of expenses which are to be implemented along with the establishment of VAT procedures, which will allow the smooth functioning of many of the periodic VAT routines in a compiled manner.
Are there any conditions to be met to ensure that the VAT expenses are eligible for reclaim?
There are criteria listed down in the UAE VAT regulation with respect to the eligibility of any VAT expense to be reclaimable. These factors as listed below are to be carefully considered while slotting in the procedures for VAT function of any organization.
- The first and foremost condition is that the VAT expense incurred for making taxable supplies alone is eligible for a reclaim or input tax recovery. Hence any VAT expense incurred directly relating to the making of any exempt supplies cannot be recovered.
- Also there should be a valid tax invoice received and maintained to show as a supporting for the VAT expense incurred. It is important that the tax invoice includes all the required details to demonstrate the VAT expenses being reclaimed.
- Another significant element in determining the eligibility of reclaimable VAT expenses is the payment of consideration for the respective expenses incurred. The recipient availing the expenses shall either pay or have the intention to pay off those invoices within six months after the date agreed with the vendor for the payment.
How to identify reclaimable VAT expenses from VAT expenses incurred for common administrative expenses?
It is very common that the entities often incur VAT expenses which are partially for making taxable supplies, exempt supplies and for non-business purposes. Since only those VAT expenses relating to taxable supplies can be reclaimable, it can be challenging to separate the portion of VAT incurred for taxable supplies from the general expenses of the entity. In such scenarios, entities can make use of an apportionment formula to calculate the proportion of VAT expenses relating to the taxable supplies from the total of such general expenses, by first calculating the percentage of taxable supplies out of total supplies made. The amount of reclaimable VAT expenses arrived in this way will always be proportionally in line with the increase or decrease of taxable supplies out of total supplies of the entity.
What are the elements involved in the process of reclaiming VAT expenses in UAE?
The reporting of reclaimable VAT expenses has to be taken care of in the periodic VAT returns where stipulated rows are available to fill in the amount of VAT expenses incurred. The net VAT payable or VAT refund scenarios are calculated by comparing the amounts of reclaimable/recoverable input VAT with the output tax payable. A higher input VAT situation can result in VAT refund and a lower input VAT can lead to net tax liability.
Is there a timeframe in reclaiming VAT expenses as per UAE VAT law?
FTA had issued a separate clarification on the timeframe relating to reclaiming VAT expenses and apparently to ensure compliance with the outlined strict timelines, it calls for a mature internal control environment in and around accounts payable function of entities. The VAT law allows the reclaiming of VAT expenses in the first two tax periods in which such expenses become eligible for reclaim. For example, if a VAT expense is incurred and becomes eligible as per the criteria as discussed above, in the month of April 2021, the reclaim of that VAT expense is possible either in the VAT return for the month of April 2021 or in the return of next month which is May 2021.
CDA in reclaiming VAT expenses in UAE?
In order to ensure that the reclaim of VAT expenses are properly recorded and reported in periodic VAT returns, a systematic approach of VAT accounting routine is to be essentially followed. It requires expertise in VAT rules and mandates to adequately implement the appropriate mappings and VAT treatments in the business processes, reflecting the correct picture in VAT reports and returns. CDA has a dedicated VAT team of certified VAT experts who have immense experience in serving and supporting various clients for UAE VAT implementation. We are equipped with tools and techniques that enable thorough assessment of expenses incurred and their relationships with the supplies of the entities for incorporating the classification of reclaimable VAT expenses accurately.
This brings us to the conclusion of the discussion on how to identify reclaimable VAT Expenses in UAE. Still, have queries about reclaiming VAT expenses in UAE? Reach out to CDA for further discussion relating to UAE VAT and about the possible services that we can offer you in this context.