Case Study on Claiming Input Tax in UAE For Expenses Incurred Prior To VAT Registration.
In UAE, mandatory VAT registration is required only for those businesses whose value of supplies exceeds AED 375,000 in previous 12 months or anticipated to exceed in next 30 days during the current financial year. For businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year, the VAT registration is optional.
So there are two phases to the journey of the businesses, Pre-Registration and Post registration.
In pre-VAT registration phase, they had to pay VAT on their purchase/expenses but were unable to recover Input VAT, Because only the registered business are allowed to recover Input VAT. In the post-registration phase, they are required to collect VAT on taxable supplies and also, they are allowed to recover the Input VAT paid on purchases/expenses.
As per above discussion the confusion is about reclaiming the Input VAT paid before registration. Are businesses allowed to recover the VAT paid before VAT registration?
Case Study on Claiming Input Tax in UAE
LMN LLC, incorporated on 1st February 2019, is a company operating from Dubai. As the company has taxable expenses exceeding the voluntary VAT Registration threshold of AED 187,500/ – it has voluntarily applied for VAT Registration in the UAE in August 2019. The company got registered for VAT in UAE with effect from 1st August 2019. The first tax period of the company was August to October and the first tax return becomes due for filing on 28th November 2020. Now the question is that whether the company is allowed to deduct in the first tax return, the input tax in UAE paid on expenses incurred prior to the registration?
Article (56) clause (1) of the Federal Decree-Law No 8 on Input Tax Paid before Tax Registration specifies that a taxable person to recover the input tax in UAE paid on goods and services purchased prior to the date of VAT registration on the first tax return submitted following the tax registration. Such recovery is permitted subject to the condition that goods and services were used to make supplies that give the right to input tax recovery upon tax registration. In this case, the LMN LLC can recover the input tax incurred prior to the registration in the first tax return filed on 28th November 2019. However, LMN LLC may not recover the input tax in UAE in the following instances:
- Goods and Services purchased for the purpose of making non-taxable Supplies. This implies that, you can recover VAT, only if it is used for making taxable supplies including zero-rated supplies.
- If the Services were received more than five years prior to the date of Tax Registration.
- Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration. This implies that If part of the asset is depreciated then Input tax cannot be recovered on such assets to the extent such assets are depreciated. For example, if you purchase a fixed asset with an expected life of 10 years and when you register for VAT the asset has only 4 years of use left. In this case, you can reclaim only 40% of the VAT you originally paid.
- Where a Person has moved the Goods to another Implementing State prior to the Tax Registration in the State
If LMN LLC incurred all the expenses for making taxable supplies before VAT registration, then LMN LLC can recover such input tax expenses in the first VAT returns.