How Much Do You Know About ‘Irrecoverable VAT’ In The UAE?

Non-Recoverable Tax on Entertainment Services

In context to the UAE VAT law, where the businesses recover VAT on most of the operational expenses, whilst the tax paid on certain expenses cannot be recovered which is in line with the UAE’s VAT law (Article 53). It states that VAT paid on expenses such that falls under the area of entertainment as well as those related to motor vehicle with specific application are non-recoverable in nature and shouldn’t be claimed during VAT filing. In this article most of the businesses’ clarifications would be addressed in context with the Federal Tax Authority’s (FTA) publication issued.

Entertainment categories that includes hospitality service in accordance with the law for which the VAT cannot be recovered are as follow:

Entry tickets to any sort of shows or events or any such entertainment activity with leisure
Any entertainment trips for a specific purpose of acquiring pleasure and fun.
Food, snacks, drinks or such refreshments that are usually presented in the routine meetings.
Motor vehicle expenses for personal use such that initially the asset was bought or rented merely for the business operations however is made available for personal use.

Considering above points on non-recoverable VAT, though there are certain conditions applicable to the above events that may turn the VAT expense to a recoverable one. Let’s look into such possibilities and instances where VAT can be recovered:

Entertainment expenses/services provided to non-employees occur in the designated government entities can claim VAT for such expenses in specific scenarios, for instance, meetings with delegations where lunch or dinner is served. Besides, expenses occur during meetings with the government officials where business plans are discussed and also ceremonies held to mark the political events where specific agreement is signed to provide meal to the audience.
Simple hospitality that takes place in the normal course of business; or instance hiring new employees and providing them with some snacks and refreshment during induction training or first day at office.
Petty expenses related to Pantry items such as coffee, tea, sugar, office show piece displays etc.
Reimbursement of amounts to employees where the expenses are claimed against the official business trips took place domestically, which includes hotel accommodation and their relevant expenses.

Inceptive hotel accommodation that has followed with the recruitment of new employees and which is temporary.

One of the instances where employer had promised to reimburse the conveyance expenses of their employees due to business reasons that is required for employees to perform late night shifts etc. This is considered as a contractual obligation and therefore the vat paid on such expenses can be claimed.

Recovery of VAT on life insurance and reinsurance:

This is probably the case in GCC countries that life insurance is typically exempted from VAT. Exemption here specifies that there will not be any VAT charged on the provision of life insurance coverage. The definition of ‘life insurance’ is expected to be constructed to insurance against the death of an individual only, this definition has been implied for the purpose of VAT clarity on life insurance.

However, VAT cannot be claimed on those incurred expenses that are in relation to making these exempt supplies. For instance, the VAT charged on commissions paid to brokers will not recoverable, instead this VAT will be a cost that must be borne by the business. On the contrary it has been observed that with regards to the imposed jurisdictions, VAT charged on any other non-life insurance such as health and marine cargo, in such instances input vat can be recovered whenever the input vat is incurred in making these supplies.

VAT recovery and treatment on financial services

Since we all are aware that financial services evolve around extensively complex transactions, nonetheless FTA has provided a complete guide for such complex business transaction practices which includes margin and spread. FTA had published a VAT guide for the financial services industry and had cleared many ambiguities among such financial institutions. The FTA has stated in its statement that in compliance with the GCC VAT agreement, has taken a detailed yet narrow approach to the use of VAT exemptions and with respect to the financial services it had specified that the commencement of stage for the UAE VAT treatment on financial services is that VAT should be charged as and where it is practicable to do so. Hence, financial services imply VAT charges at the standard rate of 5% which is charged on services specified such as an explicit fee, discount, premium charges/commission, rebate or similar sort of charges. Whilst all other transactions in the financial sector are exempted, thus subject zero-rated or out of the scope of VAT which relies on a condition on the criteria of transaction with respect to the location and status of the customer.

Irrespective of the businesses operations who undertake financial services and do not fall under the umbrella of financial sector, should review their transactions incorporated with the FTA guide. This is important as it will help in identifying the discrepancies and inconsistencies that may exist which might be elevating the area of risk and needs important attention to be addressed. Such instances in the companies need correction with the tax authorities and resolve the issue by updating the internal procedures to monitor the foreseen penalties and to mitigate the risk perceived instantly. On the contrary, further clarification and dispute resoluteness steps can be taken where a tax payer has an alternative explication of the law that they may need to follow.

Besides all the businesses with the exempt activities being it financial services, transportation or real estate should take extra care and precautionary measures to have minimum intervention of the FTA.

VAT exemptions on Bare land

Before plunging right to the subject, let’s understand the definition of ‘Bare land’.

Bare land is a land that is not occupied by completed buildings or buildings construction under process/partially completed or civil engineering works under process. So, what is Bare land? the end here means that a space on the earth’s surface that may include trees or natural objects beneath or on top of it. Whereas the ordinary meaning associated with ‘Bare land’ is a land that is a vacant land and has no completed or partial building on it at all. A land to be considered as a bare land under UAE VAT law; it should fit below criteria such that none of these should be present on the land:

Completed buildings
Partially completed building
Civil engineering works

Now let’s look into the VAT application on bare land in UAE. VAT is expected on the supply of a bare land in UAE. Supply of bare land in the form of lease or sale covers under this aspect. Consequently, VAT on expenses associated with the bare land shall not be recovered by the supplier which includes agent fees, legal fees etc.

On the contrary where the plot of land is bargained and further supplied and which doesn’t see the definition of bare land under UAE VAT law will be subject VAT as per the standard rate of 5%. Consequently, supplier may claim the vat input for incurred on the costs associated with the supply of land plot.