The Federal Tax Authority (FTA) has confirmed that the credit of input tax will not be allowed on certain types of business expenses. Common business expenses that incur on a daily basis, including entertainment and other personal expenses, are not eligible for tax refund. Read further to check the list of business expenses for which refund of the VAT is blocked.
It is important for businesses in UAE to know which of their taxable business expenses are eligible for VAT refund and which ones are not. They should, therefore, not claim a refund of tax paid on non-eligible expenses.
The following 3 types of business expenses are not eligible for input VAT recovery in the UAE:
- The use of company motor vehicles for personal purposes
- Expenses on entertainment
- Expenses related to business employees
List of Business Expenses on which VAT Credit is not allowed
VAT registered businesses in the UAE cannot claim a refund of input VAT paid on any expense related to entertainment for anyone other than the company employee, including business customers, clients, officials, owners, shareholders and/or investors.
The entertainment expenses not eligible for input tax recovery are:
- Hospitality, such as accommodation, drinks and food, not provided during a meeting
- Trips for pleasure or entertainment
- Shows or events
A business cannot recover the VAT paid on any such expenses.
The input tax credit will not be available for certain business expenses made for the benefit of employees. This includes any expenses for which employees are not charged and the ones which are incurred for the personal benefit of the employees, i.e. a company cannot recover VAT paid on such expenses.
However, input VAT credit shall be available on certain employee expenses, including –
- VAT paid on goods or services which are mandatory by a UAE labour law for employers to provide to their employees
- The goods and services provided by the employer to the employees as part of a contractual agreement or documented policy to enable them to do their job or as a normal practice of the business.
For example, if a company has it mentioned in their employment contract that employees will be provided conveyance to and from the company office, for late night shifts. Since this is a type of a contractual agreement, so the company can claim back the VAT paid on these expenses.
Personal Use of Company Motor Vehicles
In normal situations, a UAE organization can recover the VAT paid on the purchase, lease or rental of a motor vehicle for the business purpose. However, the credit of VAT shall not be available on the purchase, lease or rental of motor vehicles which can be used by anyone in the business for personal purpose.
The term ‘motor vehicle’ here represents any road vehicle which can accommodate no more than 9 people, apart from the driver. A commercial vehicle, such as a truck, hoist, forklift or any other similar vehicle will not be treated as a motor vehicle. The VAT calculation on commercial vehicles is separate from this rule.
A motor vehicle from any of the following categories cannot be used by an organization employee for any personal purpose:
- A licensed taxi
- A motor vehicle registered to be used by a particular emergency service, such as fire brigade or the police or similar emergency services
- A vehicle registered to a vehicle rental business for the purpose of renting to a customer.
All the above expenses incurred by an organisation are not liable to recover the tax. For more details about the same, you can check the FTA website.