As the VAT (Value Added Tax) system in the UAE completes its first year, many businesses are engaged in analysing their tax liabilities and especially adjusting their end-of-year input tax dues, if any. Input tax recovery is generally made by partial exempt taxpayers who claim input tax for the supplies which are exempted.
Such taxpayers need to review their input tax records and the amount recovered over the last year to detect any mistakes and miscalculations.
The aim of annual input tax adjustment is to find and correct any fluctuations in the input tax recovery which has already been made during that particular tax year.
Here are a few tips and procedure to help you easily process your end-of-year input VAT adjustments.
Table of Contents
Know your tax liability and period
The tax year is not always the same as the calendar year. For a taxpayer who files quarterly VAT returns, the tax year ends as per the following criteria.
- If your tax period is ending on 31 January/April/July/October, the tax year will end on 31 January.
- If your tax period is ending on the last day of February/May/August/November, the tax year will end on the last day of February.
- If your tax period is ending on 31 March/June/September/December, the tax year will end on 31 March.
However, if you file monthly VAT returns, your tax year ends with the last day of the calendar year, i.e. 31 December.
You should calculate the end-of-year input tax adjustments and file the same in the first tax period of the following tax year. For instance, if the tax year is ending on 31 March for you, you should file adjustments in the June tax return.
How to know your end-of-year input tax adjustments?
Taxpayers who are eligible for input tax recovery against exempt or non-economic supplies must calculate their input tax amount/eligibility for each tax period.
This is how it can be done:
First of all, the taxpayer needs to filter out the expenses which were made on the tax-exempted supplies. Then, he/she needs to calculate the input tax which is to be incurred on the particular supply. Second, the taxpayer needs to calculate the input tax which is not attributed to any particular supply.
The same calculation must be repeated by the taxpayers at the end of each tax year in order to calculate and make input tax adjustments.
Actual use adjustment
Now that you have calculated the annual input tax recovery following the standard method explained above, you may now need to make the adjustment in the recovered input tax based on the actual use.
In the actual use adjustment, the availability of input tax is determined on the basis of the type of expenses on which the tax was recovered and the supplies for which these expenses were made in the first place.
The actual use adjustment is required to be carried out in case if the difference between the input tax calculation via these two methods (standard and actual use) is more than AED 250,000.
Capital Asset Scheme
Capital Asset scheme is a special scheme under UAE VAT designed to govern the input VAT recovery on large value capital assets which have long-term usage. Any assets or expenses with a value over AED 5 million (excluding VAT) and having a life of more than 5 years (10 years in case of buildings) qualify for the Capital Asset Scheme.
A taxpayer must confirm whether any of the expenses incurred by them on assets quality under this scheme. If so, they need to verify and adjust the amount of input tax recovered during the tax year against the use of the capital asset.