UAE VAT: New Rules for Input Tax Recovery on Employee Expenses

UAE VAT: FTA Clarifies Input Tax Recovery on Employee-Related Expenses

Federal Tax Authority Decision No. 17 of 2026 | Effective 1 October 2026

The Federal Tax Authority (“FTA”) has issued Decision No. 17 of 2026 – Cases and Conditions for the Recovery of Input Tax on Employee Expenses, providing specific conditions under which businesses may recover input VAT incurred on certain goods and services provided to employees free of charge.

The Decision was issued on 9 September 2026 and will take effect from 1 October 2026. It provides greater clarity on the circumstances in which employee-related expenses can qualify for input tax recovery under the UAE VAT legislation.

The Decision applies where goods or services are provided to employees at no charge pursuant to a contractual obligation or documented company policy, in accordance with Article 53 of the UAE VAT Executive Regulation.

What employee expenses are covered?

The Decision identifies six categories of employee-related expenses where input VAT may be recoverable, provided the specified conditions are satisfied.

1. Employee transportation

Input VAT on employee transportation may be recoverable where the transportation is provided:

• Between the employee’s residence and workplace;
• To clients’ premises; or
• For other purposes directly related to the employee’s job duties.

The transportation must not be provided for the employee’s personal benefit, and the employee must not have the option to receive a cash allowance or other financial compensation instead of the transportation service.

This provides an important distinction between business-related transportation provided as part of the employer’s operational requirements and transportation that effectively constitutes an alternative employee benefit.

2. Food and beverages provided to employees

Input VAT on food and beverages may be recoverable where the employee’s circumstances and work location justify the provision of such facilities.

The conditions include:

• The employee resides in a remote, distant or isolated area;
• Suitable facilities for preparing or obtaining food are not reasonably available at the employee’s residence or workplace;
• The provision is directly connected with the work or residence period required due to the employee’s job; and
• The employee cannot choose to receive a cash allowance instead.

Accordingly, the provision of meals to employees will not automatically qualify for input tax recovery merely because the employer provides the meals as part of its employee arrangements. The specific conditions set out in the Decision must be considered.

3. Accommodation provided to employees

Input VAT on employee accommodation may be recoverable where the accommodation is required because of the operational requirements of the business.

The Decision requires, among other conditions, that:

• The employee cannot choose a cash allowance or financial compensation instead;
• The accommodation is required for operational purposes and is not simply part of the employee’s ordinary remuneration or benefits package;
• The nature of the work requires the employee to reside close to the workplace, work site or client location;
• The accommodation is primarily for the relevant employee and does not extend to family or other personal use, subject to the specific exception for an employee’s usual place of residence; and
• The accommodation and its facilities are appropriate to the employee’s job requirements and basic residential needs.

This means that the business purpose and operational necessity of the accommodation will be particularly important in determining input tax recovery.

4. Temporary accommodation for new employees

The Decision separately addresses accommodation provided to new employees.

Input VAT may be recoverable where:

• The accommodation is provided temporarily for no more than 30 days; and
• The accommodation is appropriate to the employee’s job requirements and basic residential needs.

Businesses providing temporary hotel or similar accommodation to newly recruited employees should therefore consider whether the arrangement falls within these specific conditions.

5. Mobile phones, telecommunications and internet

Input VAT on mobile phones, airtime, data packages and internet access provided to employees may be recoverable where these services are necessary for employees to perform their duties.

The Decision requires that:

• The goods or services are necessary for the employee’s work, including remote working or work-related communications outside normal working hours;
• Their use is limited to business purposes, or personal use is only incidental and insignificant;
• The employer has a documented internal policy governing their use; and
• The employer has reasonable monitoring mechanisms to verify compliance and retains relevant records where unauthorised use occurs.

This is particularly relevant for businesses that provide employees with corporate mobile phones, SIM cards, data packages or home internet arrangements.

A documented policy and evidence of monitoring will therefore become important components of the VAT support file.

6. Employee parking

Input VAT on parking fees may be recoverable where the parking is incurred solely for business purposes and is directly related to the employee’s performance of job duties, business visits or related assignments.

The employer must also:

• Have a documented policy governing when employees may be reimbursed for parking;
• Have an appropriate approval mechanism; and
• Retain evidence of the parking payment, including the date, time, amount and VAT paid.

Businesses should therefore ensure that parking reimbursement claims are supported by appropriate documentation rather than simply being processed as general employee expenses.

Documentation and internal policies are key

One of the notable features of the Decision is the emphasis placed on documented policies, business purpose and supporting records.

For several categories of expenses, the ability to recover input VAT is linked not only to the nature of the expense but also to the employer’s ability to demonstrate that:

• The expense is required for business purposes;
• The employee does not have the option of receiving a cash alternative;
• Personal use is restricted or insignificant, where applicable;
• The employer has appropriate internal policies; and
• Relevant supporting records are maintained.

This means businesses should not consider VAT recovery solely by reviewing the underlying invoice. The substance and purpose of the employee benefit, together with the company’s internal controls, will also be relevant.

Practical considerations for businesses

With the Decision taking effect from 1 October 2026, businesses should consider reviewing their existing employee expense policies and VAT recovery procedures.

In particular, businesses should:

1. Identify employee-related expenses currently being treated as non-recoverable input VAT and assess whether they fall within one of the six categories covered by the Decision.
2. Review employment contracts and company policies to establish whether the provision of the relevant goods or services is contractually required or supported by a documented policy.
3. Introduce or update internal policies covering areas such as mobile phone usage, parking reimbursements, employee transportation and other relevant expenses.
4. Strengthen supporting documentation, including invoices, receipts, approvals, employee records and evidence demonstrating the business purpose of the expenditure.
5. Review personal-use arrangements, particularly for telecommunications and accommodation, to ensure that any personal use is within the limits contemplated by the Decision.
6. Review VAT recovery procedures to ensure that input VAT is only recovered where all applicable conditions are satisfied.

Conclusion

FTA Decision No. 17 of 2026 provides welcome clarity on the circumstances in which input VAT incurred on certain employee-related expenses may be recovered.

Importantly, the Decision does not create a general right to recover VAT on all employee expenses. Instead, recovery is permitted for specified categories where the detailed conditions are met.

For businesses, the practical focus should therefore be on demonstrating the business necessity of the expense, the absence of an alternative cash benefit where required, appropriate restrictions on personal use, and robust supporting documentation and internal policies.

Businesses should use the period before 1 October 2026 to review their existing employee expense arrangements and VAT recovery positions and make any necessary adjustments to their policies and record-keeping procedures.