UAE VAT Update – Special Input Tax Apportionment
The Federal Tax Authority (FTA) has released the latest version of the Guide on Special Methods of Input Tax Apportionment.
What is Input Tax Apportionment?
Input tax could be recovered by businesses where the costs incurred are used to make taxable supplies. Where VAT has been incurred for non-business reasons or has been incurred to make exempt supplies, this VAT will in principle, be irrecoverable. Input tax, which is used partly by Businesses that incur VAT to make both taxable supplies and exempt supplies, can recover the VAT to the extent that it relates to making taxable supplies. In practical terms, any VAT incurred on overheads and other mixed-use costs should be apportioned and only claimed in part.
This treatment of VAT incurred on goods and services is demonstrated below:
The Executive Regulations prescribe the standard method for making such an apportioned of any mixed-use VAT. Having said that, each business model is unique; the standard method may not be reflective of the actual use of goods or services by every business. Therefore, the FTA accepts alternative methods of input tax apportionment, which effective from the 1st January 2019 at the earliest. Special methods of apportionment are further detailed in the following paragraphs.
As part of the application for permission to use a special apportionment method, the applicant 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.
In the said Guide, the taxpayers applying for special input tax apportionment will now be required to provide the following information along with the form:
- A detailed description of the business activities of the applicant;
- Reasons for applying for a special input tax apportionment method;
- Historical calculations of residual input tax apportionment using the standard method of apportionment as provided in the Executive Regulations. The calculations should be for 12 months (6 months as per the previous Guide) preceding the application;
- Calculations of the residual input tax apportionment for 12 months but using the special method for which the applicant is applying, and an alternative method if applicable.
Furthermore, the FTA has released the Checklist of the errors identified by the FTA during the review of input tax apportionment special method requests as of now. The FTA requires all applicants to go through the Checklist before sending requests to the FTA. We would like to summarize the Checklist with the following:
- The applicant must provide a stamped and signed letter by the authorized signatory confirming the request to apply for the special method.
- Recovery rate percentages must be rounded to the nearest whole number.
- The applicant must indicate if their expenses are wholly attributable to either exempt or taxable supplies, or residual.
- The applicant must provide explanations on the deviations, if any, in the calculations.
For specific input tax apportionment methods
- Standard method – Blocked input tax must be excluded from the calculations.
- Output method – Expenses subject to the reverse charge mechanism must be excluded from the calculations.
- Transaction count method – Input transactions, including those expenses subject to reverse charge mechanism, shall be excluded from the calculations.
- Floorspace method – Communal areas such as lobbies and lifts shall not be considered in determining the floor space available for commercial or residential use.
- Sectoral method – If the headcount method is the chosen allocation method, the applicant must include the breakdown of the total headcount. This should show the total front and back-office staff, as well as any contracted personnel, even if not all of these staff are used in the headcount allocation calculations.
Taxpayers applying for special apportionment methods must go over at the Checklist of the errors which released by the FTA to avoid common mistakes made by applicants to minimize any queries or issues with the application following submission to the FTA.
How can we help?
Rethink as an entity provides VAT advisory, optimization, registration, implementation, compliance, and training services in Bahrain, UAE, KSA, and the GCC.
Our team is here to guide you through the VAT law and regulations and ensure full compliance with the law.
Our team of senior qualified tax advisors, finance experts, and tax accountants will ensure timely and cost-effective VAT services.
Based on our local and international experience, we understand that VAT is a complex tax and will certainly suffer numerous changes in the upcoming years. Rethink’s VAT services are aimed to suit both basic and complex returns for SMEs and larger enterprises.