The fundamentals of VAT in the UAE

The recovery of input tax

What is input tax recovery?

If you are a VAT-registered business making purchases and paying tax on your inwards supplies, you will be able to recover the tax paid on these inputs. This will result in the reduction of the value of your tax payable and will require you to only pay the balance amount as tax.

Who’s eligible for input tax recovery?

To be able to recover input tax, the inward supplies of goods and services should be used or intended to be used in making:

  • Taxable supplies.
  • Supplies that are made outside of the UAE, which would have been taxable if they were made in the UAE.
  • Supplies of financial services that are provided to a person outside of the UAE and that would have been under exempt charge if they were made in the UAE.

Reverse charge mechanism

If the taxable person is acquiring input supplies under the reverse charge mechanism, he/she will also have to make sure that these supplies are used for the above-mentioned conditions to be able to recover input tax.

If a taxable person acquires supplies for non-business use or exempt supplies, he/she won’t be able to recover the input tax incurred. Also, if a portion of the goods and services are used for making supplies that are not taxable, then the taxable person must determine the portion of the input tax that was used in making taxable supplies and only recover it.

When can I recover input tax?

A person will be able to recover input tax in the first return period if they abide by the following conditions:

  • The received tax invoice and other pieces of evidence of supply or import are retained.
  • The taxable person has fully or partially paid the amount of VAT in question.
  • The taxable person intends to make the payment within six months of the due payment.

If the taxable person cannot meet the conditions above in the first tax period, he/she will be able to recover input tax in the following return period.

An example of input tax recovery

In March your business in Dubai purchases 10 chairs for 100 AED each and pays 5.00% VAT on Purchases amounting to 50 AED. You then supply 20 chairs to customers at 200 AED each and collect 5.00% VAT on Sales on these supplies, amounting to 200 AED.

Therefore, in March, your business will have an input tax of 50 AED and an output tax of 200 AED. This means that the tax payable for the month of March will be 150 AED = 200 AED (output tax payable) – 50 AED (input tax recoverable).

The input tax recoverable reduced the output tax payable owed to the government and the taxpayer will only have to pay the balance tax payable.