VAT q&a: 'Can I reclaim the VAT on a New Year party for my staff?'
The Abu Dhabi employer is paying a package price for the food and drink at a hospitality venue
I am holding a party for my staff to celebrate the New Year in the next week. The party will be away from the office and I will pay the venue for food and drinks in an agreed package price. The amount per head is not excessive and only my employees are invited. Can I reclaim the VAT I am charged by the venue? SW, Abu Dhabi
The Federal Tax Authority have issued some really useful Public Clarification guides which can be found on their website under 'getting help'. These guides give additional detail to the published legislation on certain topics. There is one entitled “Non recoverable input tax – entertainment services”. There is a specific section on entertainment provided to employees which states: “Where events are held purely for the purposes of entertaining staff, for example staff parties, the VAT incurred on the associated costs shall be blocked from recovery unless a charge is made to the employee for attending." So, if you are paying for the party, you cannot recover the VAT.
I have been asked before whether you can get around this by charging employees a minimal fee, for example Dh10, to attend the party and then reclaim the VAT charged by the venue. Although the clarification document does not specify what the charge should be, the FTA would expect the amount to be at least equal to the costs charged per head by the venue. Any amounts charged to the employee would need output VAT accounted. Charging the employee much less than the cost and then claiming the input VAT in full could be seen as tax evasion and lead to penalties if discovered in a later audit.
We charged VAT at 5 per cent to our overseas customers by mistake. How can we correct this error? YP, Dubai
You don’t mention whether you are supplying goods or services, so first you must determine if you should have charged UAE VAT or not. For goods, the legislation is relatively straightforward, and you need to look at Article 45 of the Decree Law and Article 30 of the Executive Regulations. Subject to certain detailed conditions being met and having what is referred to as official and commercial evidence to support the export, then the transaction should be zero-rated.
The rules surrounding the export of services are more complex. These can be found at Article 45 of the Decree Law and Article 31 of the Executive Regulations. When providing services you also need to consider where your customer physically is at the time the services were performed and whether they have a permanent presence in the UAE. The law focuses on where the services are received, rather than where the entity that you are reinvoicing is based. If you are satisfied that the goods or services do fall under zero rated exports, then you need to determine what action will correct the error.
I have seen a number of examples where UAE companies have been asked to invoice an overseas company but in reality, they have provided the service to a UAE entity that is part of a group of companies. This is not allowed under the VAT legislation and the tax should be charged at 5 per cent in these cases even if the company invoiced is outside of the UAE.
Article 61 of the Decree Law, clause 1,e states that you are allowed to adjust the output tax if it was charged in error, which is what has occurred in this case. Articles 62 and 63 cover the mechanism for issuing tax credit notes. In practice you would issue a credit note that shows a credit for the full amount of the invoice with 5 per cent VAT, then on a separate line show the invoiced amount with 0 per cent VAT. The net effect would be a credit just for the VAT amount overcharged. You need to send the credit note to the customer and depending on whether this is a recurring customer or a one-off customer, you may need to make an actual repayment of the VAT the customer paid.
If you have already filed a VAT return that includes the erroneous invoices, you should raise the credit notes immediately with the current date and include the adjustment in your next return. You do not need to make any separate reference to the credit notes or to file what is known as a voluntary adjustment, as this is only required when you have underpaid output tax by more than Dh10,000. You do not mention how much the VAT error is for your invoices, but as you will have overpaid rather then underpaid it, you can just include it in the next return.
Lisa Martin, a chartered accountant with more than 20 years commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to firstname.lastname@example.org
Updated: January 7, 2019 01:15 PM