Introduction
Since the introduction of VAT in the UAE on January 1, 2018, charities have faced the challenge of understanding VAT implications for charities in the UAE. The “Charities VAT Guide (VATGCH1)” serves as a critical resource, providing essential insights into the application of VAT to charitable activities and clarifying the extent of VAT recovery on expenses. This guide is invaluable for managing tax-related matters within charitable organizations.
Key VAT Concepts for Charities
VAT and Charitable Activities
Charities in the UAE are generally subject to VAT on goods and services supplied, provided they are registered for VAT. These activities are categorized as either:
- Business Activities: Supplies made for a charge are considered business activities, and VAT must be charged. Charities can recover VAT incurred on costs associated with such supplies.
- Non-Business Activities: Activities performed without charging for goods or services are generally not subject to VAT unless classified as deemed supplies.
Donated Goods and Services
Charities often receive donated goods or services to support their operations. While these donations are typically free of charge, activities involving their use may constitute business activities if a charge is imposed.
What is Deemed Supply?
Deemed supplies occur when a charity must account for VAT on goods or services, even if no payment or consideration was received. Common scenarios include:- Use for Non-Business Purposes: If a charity recovers VAT on goods or services but later uses them, fully or partially, for non-business purposes, it must account for deemed supply VAT.
- Supply Without Consideration: When goods or services, previously treated as whole or part of assets of a taxable person, are supplied without consideration or their use changes to non-business purposes.
- Input tax was not recovered.
- The supply is VAT-exempt.
Designated Charities and Special VAT Recovery Rules
Who Qualifies as a Designated Charity?
To be recognized as a designated charity for VAT purposes, an organization must:
- Be approved by the Ministry of Community Development or established/licensed under Federal or Emirate laws.
- The charity must strictly adhere to the terms of its approval, license, or other authorization related to its charitable activities.
- Operate as a not-for-profit entity.
- Primarily receive funding through grants or donations.
Designated charities enjoy the privilege of recovering VAT on relevant expenses under a special regime, even for non-business activities.
Approval Considerations by Authorities
For criteria under legal recognition, such as approval by the Ministry of Community Development or other relevant government bodies, the following factors are evaluated:
- Permissible Activities: The charity must limit itself to the charitable activities for which it has been licensed. Any trading activities are not permitted unless they directly support the licensed activities without generating profit or if the profits are reinvested in the charitable purposes.
- Proper Management: The charity must be managed by individuals deemed as “fit and proper persons.”
Fit and Proper Test for Charity Management
The “fit and proper test” ensures that individuals involved in managing charities, including trustees, directors, employees, and volunteers, meet ethical and professional standards. Factors that may disqualify someone include:
- Involvement in tax fraud or other fraudulent behaviour, such as identity theft or misrepresentation.
- Abuse of tax repayment systems or attacks on tax structures.
- Prior removal from acting as a charity trustee by a regulator or disqualification from serving as a trustee or company director.
VAT Registration Requirements
Charities meeting the mandatory VAT registration threshold (AED 375,000 in taxable supplies) must register. However, designated charities must register regardless of thresholds to benefit from input tax recovery.
Designated charities may register as part of a tax group; however, they are permitted to form or join a tax group exclusively with other designated charities.
VAT Recovery for Charities
Non-Designated Charities
VAT recovery is limited to costs associated with taxable supplies. Mixed-use expenses (serving both taxable and non-taxable purposes) require apportionment using the standard input tax apportionment method.
Designated Charities
Designated charities benefit from broader recovery rules, including VAT incurred on certain non-business activities. Understanding the VAT implications for charities in the UAE is crucial, as these organizations can recover input tax unless specifically blocked or related to exempt supplies.
When a designated charity engages in activities that qualify for VAT recovery alongside exempt activities, it must allocate and apportion the VAT incurred across these activities using the standard input tax apportionment method.
Special Situations
Zero-Rating on First Supply
The first supply of a new building or part of a building to a charity may qualify for VAT at the zero rate, provided the following conditions are met:
- The charity must be a designated charity.
- The supply must be the first supply of that building or part thereof.
- The building must be specifically designed for use by the charity for its charitable purposes.
Relevant Charitable Activities
For the building to qualify for zero-rating, its use must align with the charity’s relevant charitable activities. These activities refer to non-profit endeavours aligned with the charity’s established purposes or objectives.
If the conditions for zero-rating are not met, the first supply of the building is taxable at the standard VAT rate unless it qualifies as a residential building, in which case special rules for residential buildings would apply.
Subsequent supplies are subject to VAT at the standard rate unless the property qualifies as a residential building.
Residential Buildings and Mixed VAT Rates
In cases where a new building is supplied as a residential property, it is possible for the first rent installment to be zero-rated, while subsequent rent periods may be VAT-exempt. This distinction highlights the significance of understanding VAT implications for charities in the UAE, particularly when identifying the building’s use and purpose.
