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The recent amendments to the United Arab Emirates (UAE) VAT Executive Regulations (VAT ER) came into effect on 15 November 2024. These amendments will significantly impact businesses across industries.
In this alert, we will discuss specific amendments related to input tax apportionment, which are particularly crucial for businesses engaged in providing exempt supplies.
Key takeaways
Background
One of the key amendments is the revision of the formula for calculating the percentage of input VAT recovery on residual expenses. The new formula expands the denominator to include “Input Tax” incurred. According to the UAE VAT Law, "Input Tax" is defined as "Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import”.
Therefore, based on this definition, the new formula would include blocked expenses and common input tax (that were previously excluded), potentially resulting in a decrease in the input VAT recovery percentage.
Previously, the denominator was represented by a narrower definition of “the sum of recoverable and non-recoverable tax”, but it is now represented by the definition of "Input Tax," which includes every input.
Calculation of Input Tax
To calculate the recovery percentage using the "standard method," the following updated formula should be used:
Input VAT directly related to Taxable Supplies
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Input VAT incurred (including common expenses & blocked expenses)
Impact for partially exempt businesses in the UAE
- The input tax recovery percentage will reduce leading to an increased irrecoverable VAT cost
- Annual apportionment calculations that are due in the periods after 15 November 2024, will need to be calculated based on the new method – again potentially leading to an increased irrecoverable VAT cost.
While the FTA is assessing the impact of these changes and may release further guidance or clarification in due course, businesses should avoid using the historical approach to calculating the residual recovery percentage. Instead, businesses may consider filing private clarifications with the FTA to ensure compliance with the revised regulations. Alternatively, to maintain ongoing compliance, businesses should adopt the new method of calculation and continue to comply with any future guidance from the FTA.
How Grant Thornton can help
Grant Thornton offers a comprehensive scope of Taxation services, helping organisations throughout the full life cycle of both Indirect and Direct taxation. Our experts help businesses by providing an in- depth analysis on new regulations and amendments, the implications on your business and guidance on compliance.
For guidance with VAT ER or other tax related matters, reach out to us.
