Article 53 of Cabinet Decision No. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (“VAT Executive Regulations”) stipulates input tax which is non recoverable by businesses.
This Public Clarification explains the application of Article 53 of the VAT Executive Regulations with regards to VAT which is non-recoverable in respect of entertainment or hospitality of any kind, including the provision of:
- food and drinks which are not provided in a normal course of a meeting and
- access to shows or events, or trips provided for the purposes of pleasure or entertainment.
VAT incurred on any costs which are used for a genuine business purpose e.g. food and drink provided during a business meeting, shall be recoverable. If such food and drink is purpose for attending an event, such costs will be considered to be entertainment cost and the VAT incurred shall not be recoverable.
Input Tax shall be non-recoverable if it is incurred by a person in respect of entertainment services provided to anyone not employed by the person including:-
- Potential Customers
Entertainment services given to employees
Where goods or services are purchased by any entity, including Designated Government Entities to be used by its employees without any consideration to provide entertainment services to employees are prevented from recovering any VAT included on such costs.
Following are the examples of entertainment services where a taxable person is entitled to recover VAT on such costs are:
- Where it is a legal obligation to provide those services or goods to those employees under any applicable labor law in the UAE or Designated Zone.
- It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role.
- It can be proven to be normal business practice in the course of employing those people.
- Where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.
For example, where a new employee joins a business and is provided with hotel accommodation for a short initial period prior to finding their own accommodation, this would not be considered entertainment and the VAT incurred on such costs would be recoverable, as this cost is necessary for the person to perform their role.
For example Simple Food &Refreshments in office & Normal lunch during business meetings, the VAT incurred on such costs would be recoverable.
Examples of entertainment services where input credit cannot be recovered
Iftar Party, Staff Birthday Party, Farewell Party, Motivational Speech & Food, Music Event & Food, Gala Dinner, this would be considered to be entertainment and the VAT incurred on such costs would be blocked from recovery.
Conference and business events
Recoverability of input tax in respect of costs incurred for catering services during conferences and business events would be dependent on whether any fee is charged from the attendees, as detailed below:
- Where a fee is charged and VAT is accounted on the same, the input tax incurred on catering services would be recoverable on the basis that the expense is attributable to making taxable supplies.
- Where no fee is charged, the input tax related to catering services will be blocked.
Input credit on the miscellaneous office expenses
The FTA considers that certain normal incidental office expenses for general use by both employees and visitors does not give rise to non-recoverable input tax under Article 53.
- Flowers in Reception, decoration on special events.
- Chocolates, or equivalent snacks which may be available in the office or during meetings for general use by employees and non-employees for no charge.
- Tea & coffee available in office.
Input Credit on the gift items forming the nature of entertainment services
If the value of the gift is more than AED 500/- per employee for a period of 12 months, it will become a deemed supply and hence will be taxable. If the value is less than AED 500/- per employee for a period of 12 months, it will not be a deemed supply. However, if such gifts are in the nature of entertainment (examples given below) input credit on such expenses cannot be recovered.
- EID Gifts
- Gift for other festivals or occasions
- Long service awards
- Retirement gifts
- Gifts given on the occasion of a wedding or
- Gifts given on Birth of a child or birthday gift
- Employee of the month gifts or
- A dinner to reward service.
Entertainment services given to non-employees by Designated Government Entity
Designated Government Entity (which is specified in a Cabinet Decision) is able to provide entertainment services to anyone not employed by the entity and shall be able to recover the input tax incurred on those costs. For example:-
- Meetings with representatives from other Government entities to discuss official business, where refreshments are provided.
- Meetings with delegations from other countries where lunch or dinner is provided.
- Entertainment is provided to the audience in Ceremonies held to mark significant political events.
- Provision of catering and accommodation services shall not be treated as entertainment services where it is provided by a transportation service operator, such as an airline, to passengers who have been delayed.
- Input Tax shall be non-recoverable where a motor vehicle was purchased, rented or leased for use in the Business and is available for personal use by any Person.
A motor vehicle shall not be treated as being available for private use if it is within any of the following categories:
- a taxi licensed by the competent authority within the State;
- a vehicle which is used in a vehicle rental business where it is rented to a customer.