Overview

Chapter summary

In conducting its business activities, a person may incur expenses which are subject to VAT (VAT incurred by a person is called "input tax"). This VAT can be recovered by a taxable person, subject to certain conditions being met. Consequently, VAT should, generally, not be a cost to a taxable person where such expenditure is incurred to make taxable supplies. However, where the taxable person is not able to recover the VAT incurred in respect of goods or services, the person is, in effect, treated as the end-consumer of those goods or services, and VAT becomes a cost to the business.

Entitlement to recover input tax

A taxable person is entitled to recover input tax incurred on the purchase of goods and services where certain conditions are met. Thus, the recovery of input tax will be permitted where acquired goods and services are used, or intended to be used, in making any of the following:^[2]

• Taxable supplies;

• Supplies that are made outside the UAE which would have been considered taxable had they been made in the UAE; and

• Supplies of financial services which would have been treated as exempt if made in the UAE, but which are provided to a person who is outside the UAE at the time of the supply, and the services are treated as taking place outside the UAE.

A taxable person is entitled to full input tax recovery in respect of goods and services used (or intended to be used) for any of the above purposes. In contrast, where the goods or services are used (or intended to be used) solely for non-business purposes or to make solely exempt supplies, the person will not be able to recover any of the input tax incurred.

In certain circumstances, goods or services will be used partly in the course of making supplies that allow for the recovery of input tax and partly for other purposes that do not allow input tax recovery. Where an expense is incurred for the making of such mixed business activity, the taxable person must determine the actual portion of the input tax on the expense that can be recovered.

Input tax apportionment per tax period

Input tax which is incurred in respect of goods or services which are used partly for making supplies that allow for VAT recovery and partly for other purposes for which VAT is not recoverable is referred to as 'residual input tax'. Residual input tax must be apportioned between those activities. Recovery will be restricted to the portion relating to supplies that allow for VAT recovery.

Step 1: Direct attribution

To identify the amount of the residual input tax, the input tax which is either recoverable or non-recoverable in full has to be excluded. Therefore, the first step is to perform the following calculations in respect of each tax period:^[3]

• Calculate the total value of input tax which is directly attributable to supplies for which VAT may be recovered under Article 54(1) of the Decree-Law. ('Fully recoverable input tax')

• Calculate the total value of input tax which is directly attributable to supplies for which VAT cannot be recovered.

Note that input tax which is specifically blocked under Article 53 of the Executive Regulation shall be excluded from this calculation.

Step 2: Residual input tax

Any input tax incurred which cannot be directly attributed to the making of supplies in respect of which input tax is wholly recoverable or wholly non-recoverable constitutes the residual input tax of the taxable person.

Step 3: Apportionment percentage

The next step is to determine the extent to which input tax may be recovered in respect of the residual input tax, i.e. the apportionment rate. The standard method for apportioning the residual input tax is provided in Article 55(6) of the Executive Regulation and is calculated as follows:

a(a + b)× 1001

Where:

• a = Wholly recoverable input tax
• b = Wholly non-recoverable input tax

The percentage should be rounded to the nearest whole number.^[4]

Examples of rounding:

Step 4: Recoverable input tax

The recoverable portion of the residual input tax is calculated by multiplying the total value of residual input tax by the percentage calculated under Step 3 above.

To calculate the total recoverable input tax for the tax period, the recoverable portion of the residual input tax shall be added to the fully recoverable input tax determined under Step 1.

This calculation is required to be performed for each period in which the taxable person incurs input tax relating to the making of exempt supplies, or to activities that are not in the course of business.^[5]

Input tax apportionment – Annual adjustments

Registrants are required to perform two additional calculations at the end of each tax year. The registrant's tax year is determined by the registration stagger and may be different than the calendar year and the registrant's financial year.^[6] If the registrant's tax year ends on a date other that the financial year-end, the registrant may apply for an administrative exception to amend the stagger to align these two dates.^[7]

The first calculation is to perform an annual washup and the second is to calculate an actual use adjustment.

Annual washup

At the end of the registrant's tax year, the person is required to perform an annual wash-up calculation as follows:

Step 1: Combine input tax recovered in returns submitted during tax year

Combine the input tax recovered during each of the tax periods forming part of that tax year by adding boxes 9 and 10 of all the relevant tax returns submitted together.

Step 2: Recalculate recoverable input tax

Recalculate recoverable input tax for the tax year as if it was a single tax period.^[8] The same principles (i.e., direct attribution and residual input tax) apply as in step 1 of section 2.3. Note that the amount of the residual input tax should remain the same, but the apportionment percentage for this calculation may vary as the intention is to smoothen the percentage by removing, for example, seasonal fluctuations.

Step 3: Calculate annual washup adjustment

Deduct the total recoverable input tax calculated in step 1 from the amount calculated in step 2 to calculate the annual washup adjustment.

Example

Company A, a registrant, makes both taxable and exempt supplies. Input tax was incurred to make both wholly taxable supplies and wholly exempt supplies, and for mixed purposes (residual VAT).

Tax year	Wholly recoverable input tax	Wholly non-recoverable input tax	Residual input tax
Quarter 1	2,000,000	3,000,000	10,000,000
Quarter 2	3,000,000	3,000,000	12,000,000
Quarter 3	3,000,000	3,000,000	8,000,000
Quarter 4	1,000,000	9,000,000	5,000,000
Total	9,000,000	18,000,000	35,000,000

The recoverable input tax per the VAT returns is as follows:

The total residual input tax recovered per the VAT returns submitted for the calendar year is AED 14,500,000. ^[9]

Full tax year	Input tax	Recoverable input tax	Total recovery
Wholly recoverable input tax	9,000,000	100%	9,000,000.00
Wholly non-recoverable input tax	18,000,000	-	-
Residual input tax	35,000,000	33%	11,550,000

Based on the above, the annual washup adjustment is calculated as the difference between the recoverable residual input tax per the returns submitted (AED 14,500,000) and the recoverable residual input tax per the annual calculation (AED 11,550,000), i.e., AED 2,950,000. In this case an excess amount of input tax was recovered via the VAT returns.

Actual use adjustment

After performing the annual washup calculation, the registrant is required to calculate the difference between the recoverable input tax per the annual washup calculation and the input tax which would be recoverable if an apportionment ratio which reflects the actual use of the goods and services to which the input tax relates was used.

The registrant is only required to make an actual use adjustment if the difference between these amounts is more than AED 250,000.^[10] For example,

Recoverable residual input tax		Variance	Actual use adjustment required
Per annual washup calculation	Per actual use
900,000	500,000	400,000	Yes
900,000	750,000	150,000	No
900,000	1,200,000	(300,000)	Yes
900,000	1,000,000	(100,000)	No

It should be noted, that the method to determine the "actual use" must be one of the special apportionment methods described in this Guide, taking into account the guidelines on which special methods can be used by which types of businesses.

Example – continued

Assuming Company A is a small retail bank which used the output-based method for the purposes of determining whether an actual use adjustment is required and it made the following supplies during its tax year:

• Taxable supplies: AED 40,000,000

• Exempt supplies: AED 360,000,000

• Residual input tax per annual washup calculation: AED 35,000,000

• Recoverable residual input tax per annual washup calculation: AED 11,550,000

Step 1 – Calculate recoverable residual input tax based on the alternative special method

The residual input tax recovery rate, using the outputs-based method^[11] is calculated as follows:

Taxable supplies (40,000,000)Taxable supplies (40,000,000) + exempt supplies (360,000,000) × 1001 = 10%

The recoverable residual input tax under this method is AED 35,000,000 x 10% = AED 3,500,000.

Step 2 – Calculate the difference between recoverable residual input tax per the annual washup and actual use

Recoverable residual input tax per annual washup (AED 11,550,000) less recoverable residual input tax per actual use calculation (AED 3,500,000) = AED 8,050,000.

Step 3 – Determine whether an actual use adjustment is required

Since the variance calculated in step 2 is more than AED 250,000, Company A is required to make an actual use adjustment.

Step 4 – Calculate the total year-end adjustment related to recoverable residual input tax

Company A is required to reduce its input tax recovery by the following in the adjustments' column in its first VAT return of the following tax year:

Annual washup adjustment	AED 2,950,000
Actual use adjustment	AED 8,050,000
Total	AED 11,000,000

Alternative input tax apportionment methods

The FTA accepts that the standard method of input tax apportionment may not be appropriate for the particular situation of every registrant. Each business is different, and the standard method of apportionment may give rise to outcomes that do not reflect the actual use of goods or services by the business. In such cases, registrants may apply for an alternative method of input tax apportionment to be used.^[12] If a special input tax apportionment method is approved by the FTA, the registrant shall apply the approved method from the first tax period following the tax period in which the approval was granted by the FTA.^[13]

The special input tax apportionment methods which are available to registrants are:

• Outputs-based method;

• Transaction count method;

• Floorspace method and

• Sectoral method.

Not every special input tax apportionment method will be available to every business. Instead, specific special input tax apportionment methods will generally be available only to businesses from certain industry sectors.

Chapter 3 of this Guide provides guidance on each of the alternative input tax apportionment methods, and the types of businesses which may apply with FTA to use them.

Where a special method is approved, it will be applied for each tax period following the date of approval as well as for the annual wash-up adjustment in the first tax period of the following tax year. Furthermore, on the basis that the special method is based on actual use, no actual use adjustment will be required in respect of tax years following the approval as long as the FTA approval remains valid. The approval will typically be granted for 4 years in the in the case of a non-sectoral method and for 2 years in the case of the sectoral method.

Outputs-based method

Transaction Count method

Floorspace method

Sectoral method

How does it work?

A registrant may apply to the FTA for permission to use a special method of input tax apportionment for the first time if the registrant has used the standard apportionment method for at least 6 months and this method does not yield a fair and reasonable result.

As part of the application to use a special input tax apportionment method, the registrant is required to identify which method it is applying for, and provide evidence that the special method of apportionment will be more appropriate than the standard method.

If the FTA approves the use of a special apportionment method, the taxpayer will typically be required to continue to use the approved method for at least 2 years.

Who may apply for a special input tax apportionment method?

To be eligible to apply for the special method of input tax apportionment, all of the following conditions must be met:

• The applicant has been registered for VAT for at least 6 months;
• The applicant makes both taxable supplies and exempt supplies/conducts non-taxable activities; and
• The standard method of input tax apportionment does not give a fair and reasonable result for the input tax recovery of the applicant.

Who can submit the application?

Generally, the Input Tax Apportionment Request Form should be submitted by the person seeking to use the special apportionment method (i.e. by the "applicant"). Where an application is submitted on behalf of a tax group, or for a member of a tax group, the request should be submitted by the representative member of that tax group. If the special apportionment method is approved, it shall apply to the whole tax group as the tax group is considered to be one and the same person from a VAT perspective.

The applicant must submit the Input Tax Apportionment Request Form via the concerned person’s Emaratax portal on the FTA’s website.Submissions will also be accepted where they are submitted on behalf of the applicant by either of the following:

• The appointed tax agent; or

• The appointed legal representative.

Please refer to the relevant Emaratax guide for more information on the process to submit the application.

Which special input tax apportionment methods to apply for?

Most applicants will be limited in respect of the types of special methods for which they can apply. Where a business is engaged in a single predominant exempt activity, depending on the type of the activity, the business is able to choose either from the outputs-based method, the transactions count method or the floorspace method for the input tax apportionment. In contrast, where a business is engaged in a number of different types of exempt activities through distinct divisions, the business is able to apply for a sectoral method of apportionment.

Please refer to the diagram on the following page to determine which apportionment methods are available to different types of businesses. The FTA will reject applications where the applicant has applied for a special input tax apportionment method which is not applicable to its specific type of business (as outlined under Chapter 3 of this Guide).

Special apportionment methods – Eligible activities

What information will you need when completing the Request Form?

The applicant is required to provide the following information as part of the request for approval to use a special apportionment method for determining the recovery rate in respect of residual input tax relating to tax periods:

• A detailed description of the business activities of the applicant.

• The reasons for applying for a special input tax apportionment method.

• Historical calculations of residual input tax apportionment in Excel format using the standard method of apportionment as provided in Article 55 of the Executive Regulations. The calculations should be for the period of 12 months preceding the application (as applicable). As an exception, if the business has not conducted business activities for at least 12 months, the calculations may be based on such shorter period.

• Calculations of the residual input tax apportionment in Excel format for the same period as above but using the special method for which the applicant is applying, and an alternative method if applicable.

Where the application is made for a sectoral method, the applicant must provide the special apportionment method calculations for each of the sectors for which the application is made as well as a description of each of the sectors.

The historical and expected calculations of residual input tax apportionment must use the real figures of the business for the relevant period of 12 months (where it is applicable). These amounts should agree to the amounts reflected in the registrant's tax returns submitted during the tax year. If there are any discrepancies, reasons for the variances have to be provided to the FTA.

As part of the calculations, the applicant should provide information substantiating the figures which are used to perform apportionment calculations for both the standard method and the chosen special method(s). For example, if the calculation indicates that the applicant made a certain amount of exempt supplies in a 12-month period, the applicant should provide a list of these exempt supplies.

Please refer to Appendix 1 for details regarding the Input Tax Apportionment Request Form.

Submitting the Input Tax Apportionment Request Form

Please refer to the relevant Emaratax guide for more information on the process to submit the form.

FTA's decision in respect of the application

Once the request is accepted, the FTA may require up to 40 business days from the date the request was received, to respond to the initial input tax apportionment request if a non-sectoral method is selected, and up to 60 business days if a sectoral method is selected.

If additional information is required in respect of the lodged application, the FTA will request the additional information. It may take the FTA a further 40 or 60 business days (based on the method selected in the application) to respond to the updated request for a special input tax apportionment method.

The decision of the FTA to approve (or reject) the use a special method is based solely on the information provided by the applicant as part of the application process. The applicant will be notified of the FTA's decision in a decision delivered via an email.

Where the FTA has approved the use of a special input tax apportionment method, the approved method may be used from the first tax period following the date of approval or any other date as decided by the FTA.

The approval will typically be granted for 4 years in the in the case of a non-sectoral method and for 2 years in the case of the sectoral method. Applicants cannot apply to change the approved method for at least 2 years following the approval (subject to the notification rules described in Section 5.4 below).

Notifications relating to change in business

Although a business is generally not able to apply to change the approved special method for at least 2 years following the approval, it is required to notify the FTA where the result produced over the full tax year by the input tax apportionment method approved by the FTA differs by more than 10% from the result the method generated at the time of application.

The applicant may submit the notification form via the concerned person’s Emaratax portal on the FTA’s website.

Following the notification, the FTA will consider whether the approved method is still suitable for the business. Where the approved method is not considered suitable anymore, the FTA may require the business to submit a new special method application in order to be able to continue using the same, or apply an alternative special method of input tax apportionment.

When to re-apply?

As mentioned above, any method approved by the FTA is valid for 2 or 4 years, depending on the method. If the registrant wants to continue using a special method after the expiration of the period, a new application is encouraged to submit the application to the FTA at least 40 business days before the expiry of the most recent approved special method. ^[14] Provided the taxable person submitted a request to continue using the previously approved special method before its expiry date, the registrant may continue using the previously approved method up to the end of the tax period during which a new decision on the request is issued by the FTA.

In case of any major changes in the business, the nature of the supplies and / or expense allocation principles, between the time of the original application data and the new application, such changes should be highlighted to the FTA in the new request.

The new application shall include the same type of information and calculations as the original application, for a period of 12 months preceding the new application.

In addition to the above, the new application shall contain a comparative overview of the recovery rates and sectors (where applicable) provided in the original application and in the new apportionment calculation requested, with an explanation of any major fluctuation in the recovery rates.