The recent introduction of corporate tax in the United Arab Emirates (UAE) has sharpened the focus on the existing Value Added Tax (VAT) system. It’s crucial to understand the distinction between these two taxes. VAT, implemented in 2018, applies to most goods and services in the UAE at a standard rate of 5%. There’s a twist, businesses registered for VAT can claim input tax credits, significantly reducing their overall VAT burden.

As many are already familiar with this aspect, let’s brush up on the key insights of the Input VAT.

What is Input VAT?

Input VAT refers to the VAT a business pays on its purchases of goods and services used for taxable supplies. This mechanism ensures that businesses only pay VAT on the value they add at each stage of the supply chain.

How Input VAT Recovery Works

In the UAE, input tax recovery allows VAT-registered businesses to reclaim credit for the VAT paid on eligible business-related purchases and expenses.

• Registration Thresholds: Businesses are required to register for VAT within 30 days if their annual taxable income exceeds AED 375,000. Voluntary registration is an option for businesses with turnovers between AED 187,500 and AED 375,000 to take advantage of input tax recovery.
• Claiming the Credit: Registered businesses can claim credit for the VAT paid on all taxable purchases, reducing their overall VAT burden and ensuring a transparent system where the final consumer pays the VAT.

Steps to Recover Input VAT in the UAE

Recovering input VAT in the UAE involves a few key steps:

1. Eligibility Check:

• Only businesses registered as taxable persons under UAE VAT regulations can claim input tax recovery (mandatory registration for exceeding AED 375,000 annual taxable sales or voluntary for turnovers between AED 187,500 and AED 375,000).
• The purchased goods and services must be exclusively used for making taxable supplies (not personal use or exempt supplies).

2. Maintain Proper Records:

• Retain valid tax invoices for every business purchase, clearly showing

1. Supplier’s VAT registration details
2. Description of purchased goods or services
3. Taxable value of the purchase
4. Applicable VAT

• A system to organize these documents (digital or physical) is crucial for a smoother claim process and reduces audit stress.

3. Calculate Input Tax:

• Businesses managing accounts manually need to carefully review each invoice to identify the VAT amount and calculate the total input tax claimable for that tax period.
• Consider using a spend management solution to streamline this process by tracking expenses, storing invoices securely, and automating VAT calculations.

4. Submit VAT Return and Claim Recovery:

• The UAE FTA mandates that registered businesses file a VAT Return within 28 days after the tax period’s end.
• This return should detail your taxable supplies, output VAT collected from customers, and input tax paid on purchases. Ensure accurate mention of the total input VAT to avoid discrepancies.
• The claimed input tax is typically refunded directly to your registered bank account by the FTA within a few weeks of filing the return.

Timeframe for Recovery

You can claim input tax in your first VAT return as soon as you have:

• A valid tax invoice.
• The intention is to make payment against the invoice within six months of the agreed payment date.

Correcting Past Returns

The FTA’s ‘Voluntary Disclosure’ provision allows businesses to correct errors or omissions in submitted VAT returns without penalties. This can be done by completing an online form on the FTA website, detailing the errors, and providing the correct information.

Maximizing Input VAT Recovery

For a smooth input tax recovery process, follow this checklist:

• Ensure purchased goods and services are used for taxable sales as per the UAE VAT Law.
• Always request a Tax Invoice for purchases where you plan to claim input tax.
• The tax invoice should have all the details for input tax recovery consideration.
• You must pay or intend to pay the full amount due for the supplies, aiming to settle the invoice within 6 months.

Be VAT Compliant in the UAE with MS

MS takes the complexity out of VAT regulations and ensures your business is fully compliant in the UAE, so you can focus on what matters most – growing your business. Our team will streamline your processes, making everything smooth and collaborative. With MS, you get more than just a service. You get a partner who understands your specific business in the ever-changing UAE market. We’ll support your growth and success every step of the way.