The Federal Tax Authority (FTA) has issued an updated version of the Input Tax Apportionment Guide (VATGIT1) in September 2025, replacing the earlier editions and introducing significant clarifications and procedural updates.
This updated guide provides enhanced guidance on the apportionment of input VAT for businesses engaged in both taxable and exempt activities. It introduces new processes under the Specified Recovery Percentage (SRP) mechanism.
Key Highlights of the 2025 Update
The updated guide introduces several notable changes and clarifications compared to previous versions.
1. Introduction of the Specified Recovery Percentage (SRP)
One of the most significant updates is including a new section on the Specified Recovery Percentage (SRP).
- What it means: The SRP allows eligible registrants to apply a fixed recovery rate for residual input tax, determined based on the recovery rate of the preceding tax year.
- Objective: To simplify the input tax apportionment process and reduce administrative burden for entities with consistent business models.
- Eligibility:
- The registrant must have been VAT-registered for at least 12 months.
- The business must make both taxable and exempt/non-business supplies.
- Validity: Once approved, the SRP remains valid for four years, and registrants cannot change the method for at least two years.
2. Revised Application Procedures for Special Apportionment Methods
The guide reaffirms that the standard input-based apportionment may not always produce fair results for all businesses.
Registrants may apply to use one of the following special apportionment methods:
- Outputs-based method
- Transaction count method
- Floorspace method
- Sectoral method
Key updates include:
- Applications must now be submitted via EmaraTax, with revised timelines:
- FTA response time: up to 40 business days (non-sectoral) and 60 business days (sectoral).
- Applicants have 40 business days to respond to FTA requests for additional information.
- Applications not submitted within 40 business days of initiation in EmaraTax will be automatically closed.
The guide also highlights that approval decisions rely on the taxpayer’s submitted data, which must be supported by complete calculations, reconciliations, and detailed justifications.
3. Enhanced Obligations for Businesses
The FTA has strengthened procedural and reporting requirements for registrants applying for or using special methods or SRP. Key obligations include:
- Annual Wash-up and Actual Use Adjustments: Businesses must perform these calculations at year-end to ensure accurate recovery, unless they are using an approved special method.
- Variance Reporting: If the recovery rate under an approved special method deviates by more than 10% from the approved rate, the registrant must notify the FTA within 20 business days.
- Record-keeping: Detailed documentation and reconciliations with submitted VAT returns must be maintained to support the recovery calculations.
Failure to comply may lead to the withdrawal of the FTA’s approval for the special method or SRP.
4. Eligibility and Conditions for Special Methods
The updated guide reaffirms and clarifies the eligibility conditions for special apportionment methods:
- The applicant must be VAT-registered for at least six months.
- The business must make both recoverable and non-recoverable supplies.
- The standard method must demonstrably produce unfair or unreasonable results.
- The applicant must submit 12 months of historical calculations for both standard and special methods.
Different sectors are eligible for specific methods:
- Outputs-based method: Educational institutions, cultural entities, financial institutions, insurance companies, and local passenger transport providers.
- Transaction count method: Banking institutions.
- Floorspace method: Real estate and property management businesses.
- Sectoral method: Large, multi-activity organizations such as banks, insurers, and real estate groups.
5. Clearer Timelines and Validity Periods
The updated guide consolidates and extends validity periods:
- Non-sectoral special method: Valid for four years.
- Sectoral method: Valid for two years.
- SRP approvals: Valid for four years.
These timelines are designed to provide administrative consistency while allowing periodic reassessment of the appropriateness of the chosen method.
6. Expanded Examples and Common Errors
The updated FTA Guide now includes several examples to help businesses correctly apply apportionment methods and avoid common mistakes observed during past reviews.
Illustrative Examples
Example 1 – Standard Input-Based Apportionment Method
A real estate company incurs AED 100,000 of residual input VAT on shared costs.
- Taxable supplies: AED 5 million
- Exempt supplies: AED 15 million
Recovery ratio = 5 / (5 + 15) = 25%
✅ Recoverable VAT = AED 100,000 × 25% = AED 25,000
The remaining AED 75,000 is non-recoverable.
Example 2 – Outputs-Based Method
A financial institution earns:
- Fee-based taxable income = AED 3 million
- Interest income (exempt) = AED 7 million
Residual input VAT = AED 50,000
Recovery ratio = 3 / (3 + 7) = 30%
✅ Recoverable VAT = AED 15,000
Example 3 – Floorspace Method
A property developer uses a shared office of 10,000 sq ft:
- 4,000 sq ft for taxable leasing
- 6,000 sq ft for exempt residential management
Residual input VAT = AED 20,000
Recovery ratio = 4,000 / 10,000 = 40%
✅ Recoverable VAT = AED 8,000
Example 4 – Sectoral Method
A diversified business operates two distinct divisions:
- Manufacturing (taxable) – 60% of total activity
- Real estate leasing (exempt) – 40% of total activity
Each sector’s input tax recovery is determined separately, using its own revenue and cost structure.
✅ This method provides a more accurate and fair reflection of recoverable input VAT.
Example 5 – Specified Recovery Percentage (SRP)
A business had an approved recovery percentage of 35% in 2024.
For 2025, it can apply the same fixed 35% rate to all residual input VAT for the year, simplifying reporting and ensuring consistency — unless significant changes occur in its operations.
Common Errors Identified by the FTA
The guide highlights frequent mistakes businesses make when applying apportionment methods:
- ❌ Failing to reconcile input tax recovery calculations with VAT returns.
- ❌ Including out-of-scope or reverse charge transactions in total outputs.
- ❌ Using incorrect or inconsistent allocation bases between periods.
- ❌ Rounding recovery percentages incorrectly (should be to the nearest whole number as per FTA guidance).
- ❌ Not providing sufficient explanations or supporting documentation for chosen methodologies.
- ❌ Applying multiple methods simultaneously without FTA approval.
These examples and clarifications aim to support registrants in maintaining transparent and accurate input tax recovery calculations and avoiding common compliance pitfalls.
Implications for Businesses
This update has several compliance implications for UAE businesses, particularly those engaged in both taxable and exempt activities (e.g., financial institutions, educational providers, and real estate entities):
- Simplified compliance through SRP – reducing the need for frequent recalculations.
- Increased documentation requirements – ensuring consistency between VAT returns and apportionment workings.
- Stronger oversight by the FTA – including mandatory variance notifications and the potential withdrawal of approvals for non-compliance.
- Opportunity for fairness – businesses can now adopt methods that better reflect their actual VAT recovery ratios.
Our Comment
The September 2025 update to the Input Tax Apportionment Guide represents a significant development in UAE VAT compliance. The introduction of the SRP and the emphasis on procedural accuracy indicate the FTA’s shift toward a more data-driven, transparent, and standardized compliance environment.
Businesses with mixed taxable and exempt activities should carefully evaluate their current apportionment methodology and consider whether a special method or SRP application could enhance accuracy and reduce compliance costs.
At XB4, we understand the importance of effectively navigating the latest FTA guidelines and ensuring full compliance with UAE tax regulations. Our experienced team of tax advisors can assist you in reviewing your VAT apportionment methodologies, preparing Specified Recovery Percentage (SRP) applications, and ensuring accurate and compliant input tax recovery calculations.
Our team can assist in:
- Reviewing your current input tax apportionment method.
- Assessing eligibility for special methods or SRP.
- Preparing and submitting EmaraTax applications with robust supporting documentation.
For tailored support or further guidance, please contact our tax team at tax@xb4.com.
