Clarifications on VAT need clarifying
Tax expert Jeremy Cape argues that there is a lot in the VAT legislation that still needs further explanation
How many more Public Clarifications on VAT will there be? Five? 10? 100?
The attitude of both the government and the Federal Tax Authority in the run-up to the introduction, and early months, of VAT was that the answers to any possible question you might have were all to be found in the Decree-Law and the Cabinet Decision.
In January, I approached the FTA in relation to a point of interpretation and was bluntly told that the answer should be obvious to anyone vaguely competent. This was on a substantially identical point on which, in the UK, Her Majesty’s Revenue & Customs provide scores of pages of detailed published guidance, will give written rulings in appropriate cases (like the one I was looking at) and on which the courts are regularly required to judge. But somehow, when transported to the UAE, it was obvious.
By its nature, there is a lot in VAT law that is not obvious. It’s not clear to me that the FTA intended to issue Public Clarifications, and it’s even less clear to me that the FTA knew six months ago that it would have to issue them.
In terms of its structure, one advantage of the UAE VAT system over, say, the UK VAT system is that it has relatively few supplies that are not standard rated. In particular, the decision to subject all food to the standard rate of VAT, rather than zero rate essentials, means that the UAE will be spared the joys of overpaid lawyers arguing whether a Jaffa Cake is a biscuit or a Pringle is a potato crisp.
The more exceptions that are introduced in the VAT law, the more borderline the issues that arise. So, for example, the Cabinet Decision applying a domestic reverse charge on jewellery requires suppliers to determine whether the “principal component” of the product is gold or diamonds, without providing detail on what “principal component” means.
The latest Public Clarification on VAT was entitled “Labour accommodation: residential versus serviced property”. The legal issue, which the Public Clarification sets out, is that the supply of a residential building is generally exempt from VAT, but serviced accommodation is standard rated at 5 per cent. In relation to the scenario being addressed “Labour camps and labour accommodation are generally areas where labourers are housed by their employers. They can take many different forms and some may provide residents with additional services on top of the living accommodation”. Whether the parties prefer the supply to be exempt or standard-rated depends on a number of factors, the main one being whether the recipient of the supply can recover any VAT charged.
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The Public Clarification then sets out a non-exhaustive list of incidental services that would not cause an exempt supply of residential property to become a standard-rated supply of serviced accommodation. Such services include the cleaning of communal areas, rubbish collection and access to facilities within a residential building such as a gym or pool. It then sets out additional services that might indicate that a supply is of serviced accommodation. Such services include telephone and internet access, cleaning of the rooms, laundry services and catering.
It does not stop there. The Public Clarification identifies that even if services are provided that indicate that the supply is of residential accommodation or serviced accommodation, there could be (i) a single composite supply; or (ii) a mixed supply with separate component parts. In determining this the Decree-Law states (and I’m simplifying here) that there is a single composite supply if there is either (i) a supply of a main component and a component which is either necessary or essential to the making of the supply or is a better means of enjoying the main supply or (ii) a supply which has two or more elements so closely linked as to form a single supply, which it would be impossible or unnatural to split.
Still with me? Not quite? Let me give an example. You rent an unfurnished apartment and move in. The landlord says that for an extra Dh1500 a month, she will provide daily cleaning and laundry. It’s highly unlikely that this would be treated as a single composite supply, not least because the daily cleaning and laundry is additional and payable in addition. However, if you rent a furnished apartment for Dh15,000 a month, and that apartment is advertised as coming with daily cleaning, free internet, etc., then the supply would probably be so treated. Each case turns on its facts, and subtleties within those facts.
To my mind, the Public Clarification raises another point that needs to be clarified. As mentioned, the situation it aims to clarify is where “labourers are housed by their employers”. Who is the recipient of the supply for VAT purposes? The labourer? Or the employer? This is important because, if the employer is the recipient of the supply, in most cases it would expect to be able to recover the VAT charged. If the labourer is the recipient of the supply, he won’t be able to recover the VAT (because he’s not making taxable supplies) but neither will the employer. If the employer enters into the contract and pays, and economically bears the cost of, the rent, then it will probably be the recipient. If the employer enters in the contract but takes the rent from the employee’s wages, I think the position is more finely balanced.
So, if anyone from the FTA is reading this column, a Public Clarification on the status of tripartite supplies would be appreciated when you come back from your summer holidays.
Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape
Updated: July 25, 2018 11:32 AM