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Abu Dhabi, UAESunday 23 September 2018

VAT Q&A: Limitations of reclaiming business expenses

Businesses could always ask the Federal Tax Authority for guidance with specific queries

A landlord making taxable supplies above the mandatory registration threshold of Dh375,000 a year must register and charge VAT to tenants. Getty Images
A landlord making taxable supplies above the mandatory registration threshold of Dh375,000 a year must register and charge VAT to tenants. Getty Images

What are the limitations on the recovery of VAT paid on business expenses? Let’s say I am a consultant. Can I claim back VAT on the expenses the firm incurs in order to generate the income for which the customer pays VAT such as office furniture, IT, the petrol used to drive to the customer, the lunch with the customer?

The input VAT paid for business expenses used in making taxable supplies can generally be fully recovered and offset against output VAT, unless for example, the outputs are exempt VAT or the final destination of the goods is another implementing Arabian Gulf state. In these circumstances different rules apply.

So VAT paid on office furniture, IT costs and petrol for business journeys can be reclaimed without limitation. When reclaiming VAT on business related petrol, I suggest you document evidence that it’s a business journey, recording start and end points, and apply an appropriate fixed petrol cost per kilometre to calculate the amount on which you want to reclaim the VAT. You will not be able to reclaim VAT on a full petrol receipt where only a portion of the petrol has been used for business journeys. Reclaiming VAT on lunch with a customer is somewhat less clear. The law includes that a simple, non-extravagant lunch with a customer as part of a business meeting should be reclaimable. Taking a customer out for lunch to treat or entertain them, however, would not be. Having food and soft drinks delivered to the office and consumed during the course of a meeting would be allowed. You could always ask the Federal Tax Authority for guidance with specific queries but, understandably, their focus is on VAT registration approvals and they may not have the bandwidth to respond quickly to every specific query.

Until such a time, the FTA has had the opportunity to carry out some VAT audits and there is increased clarity around exactly what is permitted to be reclaimed, I would advise taking a prudent approach and if in any doubt, would not recover the VAT.

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We are a real estate company licensed to manage other people’s property, meaning we can collect the rent in our name and issue tenancy contract with names of all three parties on it – the owner, management company and tenant. I have two queries:

1) For contracts running from 2017 into 2018, partially-paid or fully-paid, are we allowed to collect VAT on the rent relating to 2018. What justification can we give our tenants and what recourse do we have if they don’t pay?

2) As I understand, the landlords who meet the threshold of Dh375,000 taxable supplies can charge VAT. Does this mean if there are two shops, both with monthly rent of Dh50,000, the shop whose owner is VAT registered will collect VAT as he owns 50 other shops, while the owner of a single shop will not charge VAT. Why would the tenant choose the shop that has extra cost?

Leasing or sale of residential property is exempt from VAT, so I am assuming that part one of this question also relates to a commercial property. For contracts spanning 2017 and 2018, VAT must be accounted for and paid on the part of the contract that falls in 2018 whether or not the VAT can be recovered from the customer. The basic rule included in the decree law is that amounts paid are considered to be inclusive of VAT, however the executive regulations sets out two conditions where the payment is treated as VAT exclusive and the tenant is obligated to pay the VAT. Note that both conditions must be met: one, the tenant is registered for VAT; and two, can recover VAT charged in full or in part.

The executive regulations also state that before the law came into effect on January 1, the supplier must have asked the recipient in writing whether these two conditions were met. If this information request wasn’t made before January 1, then the base rule applies, i.e. the consideration is treated as being inclusive of VAT and cannot be recovered from the tenant. A landlord making taxable supplies above the mandatory registration threshold of Dh375,000 must register and charge VAT to his tenants. A landlord operating below this threshold would not need to register or charge VAT. As we are discussing commercial properties, I would expect that most tenants would be registered for VAT and would be able to recover any VAT charged, so it makes little difference whether they are charged VAT or not. Any tenants with start-ups, not yet registered for VAT, can recover VAT charged in the previous five years prior to their registration.

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

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