How to Claim Input Tax Recovery Under VAT UAE

In one of our previous blogs, we discussed the essentials of VAT registration. Building on that foundation, today we will cover another vital aspect of VAT in the UAE: how to recover 100% of VAT paid on business-related purchases, also known as input tax recovery. 

Input tax recovery allows businesses like yours to reduce the tax amount to be remitted to the government and improves cash flow. In this article, we will discuss how businesses in the UAE can recover input tax, including the steps involved, deadlines, and a handy checklist to simplify the process.

What is input tax recovery in the UAE?

Input tax recovery in the UAE refers to the process that allows VAT-registered enterprises to reclaim credit for the VAT paid on eligible business-related purchases and expenses.

As a business operating in the UAE, you are required to register within 30 days for VAT when your annual taxable income exceeds the mandatory threshold of AED 375,000 or if your turnover exceeds AED 187,500 (voluntary VAT registration). 

After registration, you can claim credit for the VAT paid on all taxable purchases. This reduces your overall tax burden and ensures a transparent system where the final consumer pays the VAT.

Suppose, your company paid AED 5,000 as input VAT on your monthly purchases and charged AED 7,000 as output VAT on monthly sales. Through input tax recovery, you can offset the AED 5,000 input tax against the AED 7,000 output tax, reducing your VAT payment to AED 2,000.

How to claim input tax recovery?

Here is a step-by-step process that you can follow to recover input tax in the UAE:

Step 1: Check eligibility

Planning to claim input tax for your business? Keep these two key criteria in mind.  First, input tax recovery is available only to businesses that are registered as taxable persons under the UAE VAT regulations. Registration is mandatory if your annual taxable sales exceed AED 375,000 and optional if your sales are between AED 187,500 and AED 375,000. In the second case, you can opt for voluntary registration to take advantage of input tax recovery.

Second, to qualify for input tax recovery, the goods and services you purchase must be exclusively used for making taxable supplies. This means they should not be used for personal purposes or to make exempt supplies. 

Step 2: Maintain proper records

Maintaining proper records is essential for input tax recovery. For every business purchase, you should retain a valid tax invoice that clearly shows: 

• Supplier’s VAT registration details
• A description of the goods or services purchased
• Taxable value of the goods and services purchased
• Applicable VAT

Whether you prefer a digital or physical copy, having a system to organise these documents is important. This will save you time while facilitating a smoother claim process and reduce stress during audits.

Step 3: Calculate input tax

The next step is to calculate the input tax. If you are managing your accounts manually, you need to carefully review each invoice to identify the VAT amount. You then have to tally these amounts to determine the total input tax you are eligible to claim for that tax period - a fairly time-consuming process. 

A robust spend management solution can streamline this process by tracking expenses, storing invoices securely , and automating VAT calculations. 

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Step 4: Submit VAT Return and claim input tax recovery

The UAE Federal Tax Authority (FTA) mandates that registered businesses file a VAT Return within 28 days after the end of the tax period. 

This tax return should detail your taxable supplies for the period, the output VAT collected from customers, and the input tax paid on purchases. Make sure you accurately mention the total input VAT while filing your returns to avoid discrepancies.

The input tax you claim on your VAT return is typically refunded directly to your registered bank account by the FTA within a few weeks of filing the return. 

Timeframe for input tax recovery 

You can claim input tax in your first VAT return as soon as both of these conditions are met: 

• A valid tax invoice has been received.
• The recipient company intends to make payment against the invoice within six months of the agreed payment date.

For instance, let’s say you purchase office supplies with a VAT of AED 100 on 1st May 2024 and receive the proper Tax Invoice in the month of January. In this scenario, you can claim the AED 100 input tax recovery when you file your VAT Return for the tax period ending 31st May 2024.

Correcting past returns through voluntary disclosure

It may so happen that you find an error in your VAT return after it has already been submitted. In such cases, the FTA provides a helpful provision known as 'Voluntary Disclosure'. This option allows you to correct errors or omissions in their submitted VAT returns without incurring penalties.

To submit a voluntary disclosure, you need to complete the online form available on the FTA's website, detailing the errors or omissions and providing the correct information. 

Checklist for input tax recovery in the UAE

To simplify the process of input tax recovery, we have created a checklist you can follow to cross-check and ensure you recover input tax as per FTA guidelines. 

Conditions for input VAT recovery in the UAE

1. Ensure that the purchased goods and services are used to make taxable sales as specified in the UAE VAT Law (standard 5% VAT or zero-rated exports).
2. Always ask for a Tax Invoice for purchases on which you plan to claim input tax. This acts as your official proof of the transaction with VAT details.
3. The tax invoice should have all the details of the supply being considered for input tax recovery.
4. You must pay or intend to pay the full amount due against the supplies. Aim to settle the invoice within 6 months of the agreed date of payment to ensure it is a genuine business expense.

Supplies not eligible for Input VAT Recovery

1. Some supplies, like public transport, bare land, or financial services, are exempt from VAT in the UAE. Input VAT cannot be recovered on these.
2. Recreational expenses you incur while entertaining your clients and employees are not considered business expenses and will not be eligible for input VAT recovery. One exception to this rule is expenses related to business meetings. 
3. Input VAT can only be recovered on commercial vehicles like delivery vans that are used only for business purposes. VAT on expenses for personal cars used by employees or owners is not eligible for input credit.
4. Free goods or services provided to employees for personal use might not qualify for input VAT recovery. For instance, the VAT on free gym memberships for employees might not be recoverable.

Conclusion

Understanding the different aspects of input tax recovery can be a game-changer for your business finances. By claiming back the VAT you pay on business purchases, you can significantly reduce your overall VAT bill and free up valuable cash flow to reinvest in your business. However, VAT returns can be a complex task, and manually entering data from receipts is time-consuming and error-prone.

This is precisely where Alaan can help; the spend management solution automatically extracts VAT information from scanned receipts and categorises them according to the applicable rate. This minimises the risk of errors that could delay your return or lead to penalties while saving time, freeing you up to focus on what matters most – running your business. 

To know more about how our solution can streamline your VAT and corporate tax, get in touch with our team today!