Understanding Input Tax Recovery under VAT UAE

The UAE's VAT system allows businesses to reclaim VAT paid on eligible purchases and expenses, which can significantly reduce their overall tax liability and improve cash flow. This process, known as input tax recovery, is an essential mechanism for businesses registered under UAE VAT.

• How can you recover 100% of the VAT paid for business purchases? 
• What are the eligibility criteria for input tax recovery under VAT UAE? 
• What is the process to claim input tax recovery in UAE? 
• How do you qualify for input tax recovery? 

What is Input Tax Recovery in UAE?

To understand what tax recovery means, let’s first understand input tax and output tax.

• Input Tax: It is the tax charged when you buy goods or services for your business. Basically, it’s the VAT charged for business purchases. 
• Output Tax: It is what you collect from your sales. You need to pay back the Output Tax you collect from your customers. 

How is Input VAT Recovered?

Input VAT recovery can be done in two ways:

Offsetting VAT

Businesses whose output VAT (VAT collected from sales) exceeds their input VAT (VAT paid on business purchases) can offset the input tax against the output tax in VAT return. This means that when filing your VAT return, you can reduce the total VAT you owe by the amount of input tax you’ve already paid on eligible purchases. This process lowers your overall VAT liability

VAT Refund

If your input tax exceeds the output tax in a tax period, you can claim a VAT refund in UAE.  It's typically available only in the following scenarios:

• Foreign businesses: Those buying goods in the UAE and selling them outside the country can claim a VAT refund to help reduce costs and promote exports.
• UAE Nationals: Citizens building new residences can recover VAT on related purchases.
• Tourists: Purchases made by tourists are eligible for VAT refunds, supporting tourism in the UAE.

The main difference between the two methods is that the offset reduces the VAT you owe, while the refund involves an actual monetary return, typically deposited into your bank account. The refund option is not available when offsetting VAT.

Eligibility for Input Tax Recovery in UAE

Input tax recovery under UAE VAT law allows taxable persons to reclaim VAT paid on purchases if certain conditions are met:

• The goods or services are used or intended for making taxable supplies.
• The supplies would be taxable if made in the UAE.
• Certain financial services are provided to clients outside the UAE.

Common Scenarios Where Input Tax Recovery is Not Allowed

There are many types of purchases that won’t make it possible to claim input tax. They are:

• If goods or services are solely for non-business purposes, or personal use then input tax cannot be recovered.
• You can not recover the input tax on exempt goods or services or exempt supplies like:
  • residential properties
  • undeveloped lands
  • public transport services
  • life insurance
  • certain financial services.
• For mixed-use items, businesses must find out the recoverable portion of input tax based on actual usage. For example, you purchase a laptop that you only use 60% of the time for business use and the rest for personal use. In such a case of mixed-use, you can claim 60% of the VAT paid for the laptop.
• Costs incurred for entertaining clients, like meals and events, usually don't allow for input tax recovery.
• Input tax on the purchase/lease of cars is often restricted unless used by a taxi company, vehicle rental services, or emergency services (like police cars or ambulance services)

How to Claim Input Tax Recovery Under VAT in UAE

Follow these steps to successfully claim input tax recovery under VAT in the UAE:

Step 1: Check Eligibility
Confirm that your business is VAT-registered and making taxable supplies. Ensure that the purchases on which you wish to claim VAT are for business purposes and meet the criteria for taxable supplies.

Step 2: Maintain and Compile Records
Always retain a valid tax invoice for each business purchase. The invoice must include the supplier’s VAT registration number, a description of the goods or services purchased, and the taxable value and VAT amount paid. Proper record-keeping (either digital or physical) is essential to ensure a smooth VAT recovery process and prevent issues during audits.

Step 3: Calculate Input VAT
For each purchase, identify the VAT paid (input VAT). Sum the total input VAT for all eligible purchases within the tax period.
Example:

• Purchase Amount: AED 100,000
• VAT Paid: AED 5,000
• Sale Amount: AED 140,000
• Output VAT Collected: AED 7,000
• VAT Payable = AED 7,000 (Output VAT) - AED 5,000 (Input VAT) = AED 2,000

Step 4: File the VAT Return
VAT returns must be filed with the FTA within 28 days after the end of the tax period. The return should include total taxable supplies for the period, output VAT collected from customers, and input VAT paid on business purchases. The FTA typically processes the refund or offsets the input VAT against output VAT, depositing the net amount into your registered bank account.

Best Practices for Input Tax Recovery in UAE

In recovery, missing details, like missing invoices, misdated entries, incorrect documentation, or mismatched supplier records, is easy. These slip-ups can lead to rejected claims or penalties of up to AED 20,000. A thorough checklist like the following helps prevent these errors:

• Confirm that purchases are related to taxable business activities.
• Collect accurate tax invoices with all VAT details.
• Keep records showing that expenses are for business needs.
• Make sure that your supplier is VAT-registered.
• Store all documents for at least 5 years.
• Ensure goods/services are not solely for exempt or personal use.
• Frequently reconcile input and output tax to catch discrepancies early.
• Educate your team on VAT regulations to avoid common mistakes.
• Conduct internal audits to ensure all claimed expenses meet VAT eligibility requirements.

Conclusion

For a smooth and error-free input tax recovery, keeping your records and invoices organised is the key. Regularly review your records to catch mistakes early, and ensure that you verify your suppliers’ VAT registration status. Consider maintaining a backup system for electronic documents. These are a lot of different operations and have a chance of a lot of slip-ups.