19 April 2023 • 2 minute read
Federal Tax Authority publishes new guide on Input Tax Apportionment
On 22 March 2023, the Federal Tax Authority (FTA) published an updated version of the Value Added Tax (VAT) guide on Input Tax Apportionment (VATGIT1). The updated guide replaces the previous version which was published in December 2019.
The guide is relevant for companies that make both VAT taxable and exempt supplies, or conduct both business and non-business activities. Companies that fall within those categories may incur input tax on acquired goods and services that are used (i) partly in the course of making supplies that allow for input tax recovery, and (ii) partly for other purposes that do not allow input tax recovery. Such input tax is referred to as 'residual input tax'.
Input tax is only recoverable to the extent that it is incurred in relation to onward taxable supplies. Therefore, any residual input tax must be apportioned between taxable and non-taxable activities.
Under UAE VAT legislation, there are different methods to determine the extent to which input tax may be recovered in respect of residual input tax:
- Standard method of input tax apportionment
- Alternative or special methods of input tax apportionment
- Outputs-based method;
- Transaction count method;
- Floorspace method; and
- Sectoral method.
Before applying one of the special methods of input tax apportionment, taxpayers must submit an application to the FTA and are only eligible, provided they meet certain conditions. Each special method is suitable only for certain types of businesses.
The FTA has included more detailed examples and further clarity on the use of special methods in the new version of the guide.
Businesses that are active in the following industries or sectors should carefully read the updated guide:
- Real Estate industry;
- Financial industry (banks, insurance and re-insurance companies);
- Transportation sector;
- Education sector; and
- Any other businesses that make both taxable and non-taxable supplies, or that conduct business and non-business activities.