How To Manage Your End-of-year Input Tax Adjustments For VAT in UAE?

How To Manage Your End-of-year Input Tax Adjustments For VAT in UAE?

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.

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.

VAT in UAE: No VAT on Bank Deposit Interests And Dividends

VAT on Bank Deposit Interests And Dividends

The UAE’s Federal Tax Authority (FTA) expounded that income earned through Bank interest and Dividends are outside the scope of VAT in the UAE. These are passively earned interest income sourced from bank deposits/dividends and are not subject to value-added tax (VAT) in the country. So, there is no obligation to report them in the VAT return.

“VAT is imposed on the import and supply of goods and services at each stage of production and distribution, therefore, VAT implications arise only when there is a supply – if there is no supply, there is no VAT implication,” the FTA explained.

To understand more clearly let us take an example of a retail business which saves its income into a bank account to yield interest on the deposited amount then the interest earned is the income which arise from solely depositing the money in the account, & the income earned in the form of interest is earned passively because the businessmen put no efforts to earn this income.

For this, the retail business did not make a supply to the bank, and the interest income gained is not a consideration for a supply. It is simply a financial service as stated by VAT law.

“The UAE tax system stands out for its transparency and accuracy in all its procedures; it strives to establish a conducive environment, setting up all the necessary infrastructure and legislation to conduct business efficiently and effectively and ensure its growth across all sectors. This includes the banking and finance sector, which enjoys high confidence both locally and internationally while maintaining steady growth and contributing to economic development,” said Khalid Ali Al Bustani, director-general, Federal Tax Authority.

Under the VAT law, the payment or collection of any amount of interest and dividend is defined to be a financial service and is therefore exempt from VAT.

The rules under the VAT law implies:

  • Income derived in the form of interest from the bank is not deemed as supply and not accountable for VAT.
  • The interest gained from extending loans or credit are exempt supplies for VAT purposes and does not hold any such bearings.

On January 1, 2018, FTA fixed 5% VAT to be charged on the supply of other Goods and Services, and within the first year of implementation of VAT in the UAE, FTA witnessed a total of 296,000 business registration for VAT

The FTA foresees a “significant leap forward for the UAE tax system”, in 2019 and look forward to, further improvement in tax compliance rates, more registration among taxable businesses, and completely brush off the tax evasion.

No VAT on Donations, Sponsorships and Grants: Said FTA

vat on sponsorship

The FTA (Federal Tax Authority) has recently confirmed that VAT (Value Added Tax) will not be charged for donations, grants and sponsorships only in cases when they are made for no return benefit. It further added that if any benefit is received in the return of a donation, then VAT will be charged.

On the official website of FTA, a new update has been released by the authority on VAT treatment for donations, grants, and sponsorships in order to make the taxpayers aware about the changes in technicalities and procedures in the tax system.

FTA has today released a statement saying that the VAT eligibility for payments such as “donation”, “sponsorship” and “grant” cannot be simply determined by the definition, as businesses must consider the associated facts and terms before making a decision. Khalid Ali Al Bustani, Director-General FTA, further added that VAT has been designed such as to encourage charity and social activities with a focus on keeping the underlying principles in mind.

Consideration has been defined under Article (1) of the Federal Decree-Law No. (8) of 2017 on VAT as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment.”

According to that definition, donations should not be treated as considerations only if no exchange of services or benefits is taking place.

FTA further said that payment in the form of donations and grants can be received by any registered taxpayer from any third party such as an employee, relative, customer and others. The eligibility of such payments for VAT will depend on whether these payments can be treated as a payment against taxable supplies/services.

As has already been clarified several times before, the VAT can be implicated only in the case when a taxable supply is made, as the definition of consideration is quite wide under the VAT system. If a donation, grant or sponsorship is made in exchange for a direct benefit in the form of a service, VAT would be levied on such payments. However, if a donation or similar act is made without any implied benefit or service, no VAT is levied on that.

In short, a donation or grant must be unconditional and unrestricted in order for it to be eligible for VAT exemption.

As an example, FTA said that if a business is donating money to a hospital and in exchange getting space to market its offerings/products/services, it would be considered as a taxable supply and VAT would be levied on the same.

Similarly, sponsorships are usually made in exchange for a benefit or supply, such as business advertisements or promotion, then this kind of supply would not be exempted from VAT.

Conditions to Allow Foreign Businesses to Refund VAT in UAE

Conditions to Allow Foreign Businesses to Recover VAT in UAE

The foreign businesses had problems in recovering the VAT (Value Added Tax) in UAE(United Arab Emirates). So to solve this problem, the FTA (Federal Tax Authority) has given some conditions.

Conditions to be eligible for the VAT refund

The FTA gave four conditions that will help the foreign businesses to allow the recovery of VAT in UAE.

  1. The foreign businesses must not have a fixed establishment or a place of establishment in any of the VAT-implementing GCC (Gulf Cooperation Council) states or in the UAE.
  2. The foreign businesses must not pay tax in the UAE.
  3. The Foreign businesses with a capable authority must also be registered as an establishment in the jurisdiction in which the businesses are established.
  4. The Foreign businesses must be from the country which implements VAT and also gives VAT refunds to UAE businesses in the same situations.

Time period for claiming refund

The Authority said that the time period for claiming refund must be a calendar year.

  • To claim the refund of 2018, the refund applications can be made before April 2019.
  • For succeeding year, the opening date for accepting application is March 1, 2020.

Read Also: VAT Refund Scheme for Businesses in UAE

Minimum claim amount of each VAT refund application

The minimum claim amount of each VAT refund application submitted by the foreign visitors is Dh2,000 which might be single or multiple purchases said FTA. The Authority told that the applicants will need the tax invoices to submit it with the refund applications due to which on the purchases for which the applicants wants to reclaim the VAT, they have to hold on to the original tax invoices.

Situations where VAT cannot be reclaimed:

To reclaim the VAT in UAE under this plan, the state might submit the VAT refund application guaranteed FTA, stating the three condition in which the VAT cannot be reclaimed.

  1. In case the receiver of supplies being done by the foreign business, liable under reverse charge mechanism for the VAT.
  2. If the ITC of any goods or services is “blocked” from the recovery, then the VAT cannot be processed further due to which no recoverable can be done by a taxable person in the UAE.
  3. If the foreign business is an non-resident tour operator, then they cannot reclaim the refund.

Khalid Ali Al Bustani, director-general, FTA said “This procedure reflects positively on many sectors, including tourism, trade, exhibitions, conferences, etc. The reciprocity is a key condition for the procedure, whereby the Authority will refund the VAT to businesses resident in countries that refund VAT for UAE businesses visiting their territories”.

Cosmetic Services Prone to 5% VAT in UAE

Cosmetic Services Prone to 5 percent VAT in UAE

The tax experts said that the healthcare services like the cosmetic will now subject to a 5 percent VAT rate.

Most of the healthcare services are classified as zero-rated under the UAE VAT law which means that such services are subject to zero percent VAT. But it allows the VAT recovery on associated costs.

While addressing a seminar on VAT, Nimish Goel, partner at WTS Dhruva Consultants, said “The government has a keen interest and focus on promoting the healthcare industry in the UAE. Keeping this intent in mind, the government has kept basic and preventive healthcare supply at a zero rate of VAT. But there are a lot of activities that are still subject to VAT”.

As per the research reports, the healthcare expenditure is calculated to reach more than $100 billion in the GCC in which the UAE will play a very important role. It is calculated that by 2020, the UAE healthcare will reach Dh 71.56 billion.

Dr Ramadan AlBlooshi, CEO, Dubai Healthcare City Authority – Regulatory (DHCR), said that the VAT was introduced at the beginning of 2018 and after its introduction, the authority got to know about its implementation.

He said “We are keen to provide a platform to help stakeholders have a better understanding of VAT to facilitate compliance in the free zone“.

For the companies which are operating in the healthcare sectors, WTS Dhruva Consultants launched a comprehensive VAT guide at the seminar. The title of the guide is “VAT on Health Care in UAE – Impact and Insights” which gave the information about the issues related to healthcare insurance companies, service providers, and related products.

It is for the first time that someone has prepared a VAT guide for the healthcare sector in the UAE said Dinesh Kanabar, CEO and founder of WTS Dhruva addressing the VAT guide prepared by WTS Dhruva.

He said, “The guide addresses numerous issues related to the activities of healthcare service providers”.

UAE VAT Deregistration [Criteria & Disadvantages]

UAE VAT Deregistration

The VAT UAE Laws provide registered taxpayers (including voluntary registrants) and companies with provisions for VAT deregistration too. An entity can apply for deregistration if the annual turnover did not exceed Dh187,500 ($51,000) 13 months after registering with the FTA.

The VAT UAE Deregistration Criteria

Under the VAT Decree Law and Executive Regulations, VAT Registered Taxpayers and companies must fulfill the below criteria to put into motion the VAT Deregistration:

  • Total Taxable Supplies within 12 months from the date of VAT registration do not exceed Dh187,500.
  • Anticipated taxable supplies for the succeeding 30 Day period starting from the end of tax year will also not make cumulative taxable supplies or expense cross the Dh187,500 threshold.

If the above two criteria hold true for a particular entity, taxpayer or company, it can apply for deregistration.

Note: Failure to do will attract an administrative VAT deregistration penalty of Dh10,000.

The Tax Year in UAE

Tax Year varies with respect to the date of application for Tax Registration. To cite an example, if the applicant applied for voluntary registration on May 1, 2018, his/her tax year will end on April 1, 2019.

In the above case if the registrant has not made supplies equal to Dh187,500 for the tax year. And has also assessed his supplies and expenses for the next thirty days (ending on May 30) to be confirmed that the, an application for deregistration can be made before June 20.

Reportedly, more than a few thousand companies in UAE will file for deregistration owing to liquidation or any of the above-mentioned criteria. Accordingly, a number of companies will apply for registrations as they meet the registration criteria for the first time this year.

VAT Deregistration Disadvantages

One of the primary disadvantages would be the inability of businesses to make VAT input claims on supplies made by them. This will make their supply dearer by a considerable fraction which may force VAT-registered customers to look for other alternative suppliers.

Moreover, non-registered businesses would be required to pay VAT against inventory and assets procured while they were registered under VAT. This would be applicable irrespective of any VAT Claims on them.

All such supplies would be treated as deemed-supplies or self-supply of assets from date of deregistration. Hence, Businesses need to be careful while applying for deregistration.

However, there are a few underlying benefits of deregistration too. The primary among this is that they can make supplies to unregistered individuals and businesses at cheaper rates than their registered counterparts.

Also, businesses would not have to pay VAT Compliance Fees. However, experts say that the nominal threshold limit will mean that very few businesses will be eligible for deregistration.