Input Tax Recovery Under VAT in UAE
The possibilities of input VAT recovery is implied within the name of the tax itself which is “Value-Added Tax”. The ultimate tax impact to the companies is supposed to limit to the extent of their part of value addition involved in their respective stage of the supply chain and thereby companies can recover the VAT on expenses incurred to make their taxable supplies. A key component of VAT in UAE is the provision for recovery of tax paid on inputs. Also, it is important to note that before claiming for any input VAT recovery, the eligibility of those expenses is to be validated first.
Conditions to be satisfied in order to claim input VAT incurred on eligible expenses
To claim input VAT recovery on expenses, the following two conditions are to be met
- Tax invoice relating to the expense is received
- Intention to pay the invoice within six months after the agreed date of payment with the vendor
Such input VAT recovery can be included in the VAT return of the first or very next tax period in which both the above conditions are met. Apparently, companies can recover VAT of any unpaid invoices if and only if there is an intention to pay the invoice within the prescribed period.
How to reclaim the input VAT on expenses if that has been missed to be claimed in first two respective tax periods?
There can be situations where you miss to include an input VAT recovery in the VAT return of the first two tax periods in which the conditions are met for those expenses. In those cases, a reclaim of such missed input VAT can be made only through a voluntary disclosure procedure in any subsequent period to amend the reported amounts of either of those two tax periods.
Example: During the month of October 2020, the company noted that it has missed to include an input VAT recovery relating to an invoice which was received and paid in June 2020. The company submits VAT return on a monthly basis. Ideally as stipulated by the VAT rules, the company was supposed to include the claim of this input VAT in their VAT return either for the month of June 2020 or July 2020. Now the only option possible to reclaim that missed input VAT in October 2020 is to do a voluntary disclosure to amend the amounts of VAT return submitted for June 2020 or July 2020.
Voluntary disclosure relating to a return already submitted to FTA
FTA has provided the option of voluntary disclosure to help the entities to rectify and resubmit the amounts when error or omission is noticed subsequently in any already submitted VAT returns. The intention behind such an option is to help the businesses to amend any one-off errors and the specific scenarios where such an option can be availed is clearly listed down in the regulation. The form for voluntary disclosure is available along with the VAT return tab in FTA portal. The corrections which are part of the voluntary disclosure are to be made here and necessary supporting details as required are to be attached as well. It is always recommended to obtain an expert opinion before opting for such disclosures to ensure the eligibility to do such amendments and consider for any update in the business processes to avoid such errors or omissions in the future.
Implications of payment for the expense not made within the prescribed time period
This can happen if the input VAT recovery was claimed by a company relating to any unpaid invoice based on the intention to pay the invoice within the prescribed time period of six months. If payment of that invoice is not made within that period, the company has to reduce the input tax amount to the extent of the tax recovery already made, in the VAT return of the next tax period after expiry of the six-month period. In case the same invoice is paid later, then the company can claim for input VAT recovery then.
Example: If a company received an invoice on 15 January 2020 and internal approval process for payment was completed by 2 February 2020 with 15 February 2020 as an agreed date of payment with the vendor. Frequency of tax return is monthly for the company. The company included the input VAT recovery of AED 500 relating to that invoice in the VAT return of tax period February 2020. However, due to some internal process delays, the invoice was not paid by the company even by August 2020 during which the six-month period expired. Hence the company has to reduce AED 500 from the total input VAT recovery amount in the return for the period of September 2020 to nullify the impact of input VAT claimed in February 2020.
CDA for Preparation and Submission of VAT Returns
The entire process of preparation and submission of periodic VAT return requires the utmost care and diligence to ensure the completeness and accuracy of the amounts getting reported. It is extremely important to apply the correct tax treatments on the transactions and maintain the supporting documentation as stipulated by the regulation to avoid any non-compliance and penalties.
CDA can associate with you as your tax consultant, guiding you with thoughtful insights and supporting you in each step of your tax reporting cycle. Our dedicated team of VAT professionals can help you streamline your tax processes in the best possible way as seemly to fit your business operations.
This completes our discussion, hope you got a clear idea of how input tax recovery works under VAT in UAE. Still, you need expert advice on tax treatments and their implications for your business? Feel free to contact CDA. Our expert will call you back immediately and will offer you a one-hour free consultation.