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.

Input Tax Recovery in UAE [Process and Conditions]

A registered dealer is liable to pay input tax on every purchase for further course of business. Input Tax Recovery is a key feature of VAT reform in UAE. Under this, the UAE government has allowed registered persons (taxpayers) that they can recover the input tax paid by them on the purchases to avoid the confusion of double taxation in the supply chain.

It simply means that an individual can lessen the figures of input tax by claiming (recovery) the tax payable on inputs and he has to pay the balance amount of tax. Make sure that that tax is to be payable on each stage of the supply chain as value addition.

So, the amount of input tax recovery in UAE plays a significant role in the cash flow and operating expenses under VAT.

Firstly, let’s understand the process of input tax recovery-

Process of Input Tax Recovery

In Abu Dhabi, Vaah & Co has purchased 10 laptops in February 2018 and the price of per computer is AED 1,000.

In the similar month, Vaah & Co supplies 20 laptops to its customers at a price of AED 2,000. A 5 percent VAT has been imposed on the supplies made by Vaah & Co. on the supply which amounting AED 2,000.

Vaah & Co paid AED 2,000 as output tax for the month of January ’18

Input tax recoverable for the month of February ’18 is AED 500

For calculating the tax payable, we can put the figures in the formula

Tax payable = Output tax payable – Input Tax Recoverable

Hence, tax payable by Vaah & Co. for the month of January, ’18 is AED 2,000 (Output tax payable) – AED 500 (Input tax recoverable) = AED 1,500.

As you can see above, the input tax paid by the company will be reduced from their out tax liability, and they are required to pay only the balance tax to the government. This is how input tax works.

Input Tax Recovery Condition

The VAT paid on while buying the goods and services which are used for business cause and for few conditions can be recovered by a registered business.

The conditions which must be satisfied are-

A. Must Be Used To Make Taxable Supplies

Taxable supplies are the supplies on which the tax is likely to be paid (i.e. supplies made at zero-rated supplies or 5%). Only on the inputs which are used to make taxable supplies can be allowed to claim the Input VAT recovery and not the exempt supplies.

B. Recipient Gets And Keeps The Tax Invoice

The recipient who is claiming the input tax recovery on a supply must confirm that they receive the Tax Invoice involved to the supply and must be kept in the records. The Tax Invoice must show all the details of the supply which is associated with the input tax recovery which is to be claimed.

C. Recipient Pays The Remuneration For The Supply

The receiver who claims input tax recovery must pay or plan to make the payment of remuneration for the supply within a half year (6 months) after the date of supply which has been agreed for the supply.

Recoverable Input Tax

The recoverable input tax is the tax amount that has been paid or return by the Federal Tax Authority particularly to the registered taxpayer under the VAT Reform in UAE

A registered taxpayer can claim for the input tax incurred on purchases goods and services in case of:-

  • Taxable supplies
  • Supplies and Services are to be made within a state
  • Exempted Supplies that have been listed in the VAT Decree-Law must be made within the state

Blocked input tax

VAT refund is not available on the input tax paid on the following types of expenses:

  • Employee-related expenses
  • Entertainment expenses
  • Supplies used to make exempt supplies
  • Vehicles used for personal purposes

Useful Article: 7 Hidden Business Expenses Eligible for Input VAT Recovery

So, the supply for input tax recovery is a very important component of VAT in UAE. Businesses must confirm the identity supplies correctly on which input tax can be retrieved, confirm that they can satisfy the conditions for claiming the input VAT recovery and also claiming it on time.

This will help in the business by confirming the perfect cash flow and working capital. All the works can be made simple by using the VAT software which will automatically perform all these tasks w.r.t. ITC which will give enough time for you to focus on your business.

Declaration Of Input Tax Credit In Vat Return Form 201

Now, a taxpayer needs to provide the following details when filing a claim for the credit of taxes in VAT Return Form 201:

    • VAT registration number
    • ITC balance of VAT as per last return
    • Turnover details
    • Date of return filing
    • Details of pending forms
    • Difference in amount (The rate charged at the time – Actual VAT rate on the supplies)
    • Final eligible ITC on VAT