Input Tax Recovery under VAT in UAE

Input tax is the tax paid by a person on purchases or inward supplies. A major element of VAT in UAE is the provision to recover the tax paid on inputs. This means that a person can reduce the value of input tax eligible for recovery from the tax payable and only pay the balance amount as tax. This ensures that tax is paid only on the value-added at each stage in the supply chain. Hence, the amount of input tax eligible for recovery plays an important role in the cash flow and operating expenses under VAT.

Let us first understand how input tax recovery works.

Process of input tax recovery

Example: In January ’18, Jehan & Co, in Abu Dhabi purchased 10 desktop computers @ AED 1,000 each. On this purchase, Jehan & Co. pays VAT @ 5% of AED 500. In the same month, Jehan & Co. supplies 20 desktop computers @ AED 2,000 to a consumer. VAT @ 5% is collected by Jehan & Co. on the supply, amounting to AED 2,000.

Here, the output tax payable by Jehan & Co. for the month of January ’18 is AED 2,000.

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

Tax payable = Output tax payable – input tax recoverable

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

Here, as you can observe, the tax paid on purchase by Jehan & Co. can be used to reduce their output tax payable. Only the balance tax payable is required to be remitted to the Government.

Conditions for input tax recovery

A registered business can recover the VAT paid on the purchase of goods and services used for business purposes and subject to certain conditions. These conditions to be satisfied are:

Should be used to make Taxable supplies

The supplies on which tax is liable to be paid are called taxable supplies (i.e. supplies made at 5% or zero-rated supplies). Input VAT recovery is allowed to be claimed only on inputs used to make taxable supplies, not exempt supplies.

For example, Jehan & Co. purchase 20 units of Item A @ AED 50, for a value of AED 1,000. Out of the 20 units purchased, 10 units are used to manufacture Item B, which is taxable and 10 units are used to manufacture Item C, which is exempt.

Hence, Jehan & Co. can claim input VAT recovery only for the value of input used to make taxable supplies, i.e. 10 units used to manufacture Item B @ AED 50, which is AED 500.

The recipient receives and keeps the Tax Invoice

The recipient claiming input tax recovery on a supply should ensure that the Tax Invoice pertaining to the supply is received and kept in the records. The Tax Invoice should show the details of the supply related to the input tax recovery being claimed.

The recipient pays the consideration for the supply

The recipient claiming input tax recovery should pay or intend to make the payment of consideration for the supply within 6 months after the agreed date of payment for the supply.

Hence, the provision for input tax recovery is a very important component of VAT in the UAE. Businesses need to ensure that they are able to correctly identify supplies on which input tax can be recovered, ensure that they fulfill the conditions for a claim of input VAT recovery, and claim the input VAT recovery on time. This will help in ensuring optimum cash flow and working capital in the business. All this work can be made easier by the use of VAT software which will help automate each of these tasks with respect to input tax credit and leave you with enough time and resources for you to focus on your business.

For more information on these services, please contact us:

Tel: +971 43 23 1183
Mob: +971 55 899 5971
E-mail: mail@alnuaimiauditors.com

In the last two years, the number ‘5’ has found a different meaning for the people living in the UAE. For most people doing business in the GCC countries, it reminds them of the percentage of VAT (Value Added Tax) applicable to goods and services. The GCC (Gulf Cooperation Council) implemented this VAT system from the beginning of 2016 – starting off with GCC countries like UAE and Saudi Arabia. As per this tax law, businesses in UAE apply a charge of 5% VAT on all eligible business transactions.

Because it is the first time that a taxation system has been in place in UAE and a few other GCC countries, many small businesses (or SMEs) have found it difficult to come to terms with the filing of VAT returns. Implementation of VAT has been mandatory, so businesses have been made to break their heads in ensuring compliance, as any non-compliance incurs a penalty (fines as high as 50,000 dirhams). So, how can businesses avoid penalties related to non-compliance with regard to VAT filing? By ensuring they avoid the mistakes that have been reported by several businesses during the early days of VAT implementation in GCC.

In this post, we have a look at some of the most common mistakes committed by SMEs or businesses during VAT filing in GCC since 2018.

Top Mistakes Made by Small and Medium Enterprises / Companies in GCC While Filing Tax Returns

1. Lack of a Proper Plan and Accounting Setup

Many businesses failed to comprehend the complexities associated with ensuring compliance with a new tax law like VAT. They didn’t have a proper plan in place to upgrade their accounting team or hire the wrong people to tackle VAT and could not manage to have a well-trained and well-informed accounting setup required to handle VAT returns filing in the most efficient way.

2. Incorrect Understanding of VAT Legislation

Several companies failed to correctly interpret the VAT legislation related to the input tax deduction. This led to several related errors being committed, such as:

Inaccurate input VAT deduction related to blocked items or exempt supplies
Inappropriate input VAT deduction on non-compliant invoices
Wrong recovery input VAT related to capital assets
Inaccurate deduction of import VAT payment done

3. Delay in VAT Registration

While VAT registration was made mandatory for businesses, it wasn’t easy for them, considering they had to comply with all the relevant VAT regulations. The struggle to deal with VAT regulations delayed the VAT registration process for several businesses. Those companies who either delayed or failed to complete their VAT registration had to pay a penalty of 20,000 dirhams.

4. Issuing Invalid Tax Invoices and Credit Notes

If all mandatory details that need to be present in an invoice are not included, the invoice issued by businesses becomes invalid. This has been a common occurrence amongst several small enterprises. And a fine of 5000 dirhams per document is applicable for businesses that fail to issue a valid invoice or credit note.

5. Irregular Filing of VAT Returns

Businesses are supposed to file the VAT returns by the deadline date provided for the same. Since this practice is relatively new for several businesses, many have been found wanting on this front, and they have either missed filing the tax returns altogether or filed them pretty late.

Other Typical Errors Committed While Filing VAT Returns

Failure to amend VAT registration on time due to the addition of branches
Inability to maintain documents as well as records, as specified in the VAT law for UAE (which incurs a penalty of 10,000 dirham’s for the first miss, and 50,000 dirham’s for repetitive miss)
Input tax recovery related to blocked expenses like medical insurance, entertainment expenses, and so on

The above-listed errors are a few of the most common ones committed by different businesses while filing tax returns (VAT) in GCC, ever since VAT implementation has happened in the GCC in early 2016. This list should help businesses to avoid these errors in the future and save a lot of money, which is otherwise lost in paying the applicable penalties. It is high time businesses invest some time, money, and resources to train their team on VAT, get the right VAT experts/consultants and have appropriate processes in place for their accounting team to ensure perfect VAT compliance.

For more information on these services, please contact us:

Tel: +971 43 23 1183
Mob: +971 55 899 5971
E-mail: mail@alnuaimiauditors.com

Category: VAT Filing