Your Essential Checklist for VAT Exemptions in the UAE

The United Arab Emirates (UAE) introduced Value Added Tax (VAT) in 2018 to diversify the economy and provide the government with a new source of income. To ensure compliance with the VAT rules specified by the Federal Tax Authority (FTA), your enterprise needs to grasp the various aspects of this consumption tax. One such crucial facet is the concept of VAT exemptions.

VAT exemption in UAE refers to different goods and services that are not subject to the standard 5% tax. By understanding these exemptions thoroughly, you can effectively reduce your tax liabilities and achieve cost savings in the procurement and pricing of final products. However, a lack of awareness here can lead you to mistakenly pay tax on VAT-exempt items, impacting your bottom line.

Read this blog to understand the concept of VAT exemption in the UAE and find the list of exempt supplies in the country. 

Key Aspects of VAT in UAE

In the UAE, VAT operates on the ‘destination’ principle. This means that the final consumer of goods or services bears the VAT cost while businesses collect the amount on behalf of the FTA. Here is a brief overview of how this tax works in the supply chain:

VAT on Purchases (Input VAT)

When your company purchases goods or services from a supplier, you must pay a 5% tax on the purchase price. This is known as Input VAT.

VAT on Sales (Output VAT)

When your company sells goods or services to customers, you must charge 5% VAT on the selling price. This is known as Output VAT.

Claiming VAT

At the end of the tax period, you deduct the total amount of Input VAT from the total Output VAT. If the Output VAT is more than the Input VAT, the differential amount must be paid to the FTA. If the Input VAT is more than the Output VAT, then you can claim a VAT refund.

Zero Rated vs Exempt VAT in UAE

While calculating your VAT at the end of every tax period, you must accurately account for zero-rated and VAT-exempt supplies. This will help ensure that there are no oversights or errors in your tax returns and the correct tax amount has been paid to the FTA. 

Different VAT Rates in UAE 

The VAT system operates on three main tiers in the country, i.e., the standard rate, zero-rated supplies, and exempt supplies.

• Standard Rate: The standard rate of 5% is the most common and applies to a wide range of goods and services. For instance, if you procure office supplies worth AED 100, you will pay an additional AED 5 as VAT.
• Zero-rated Supplies: 0% VAT applies to specific essential goods and services in UAE. This includes exports outside the GCC and public transportation services wherein no VAT is levied at any stage in the supply chain. For example, if you import raw materials in UAE for manufacturing products that will be exported, these imports would likely be zero-rated.
• Exempt supplies: These supplies are eligible for VAT exemption in UAE. No tax is charged at any point in the supply chain for these items. Examples of such supplies include certain financial services and residential properties.

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Which sectors are VAT exempted in UAE?

As per UAE law, certain sectors are exempt from VAT, and businesses operating in these sectors are not required to register for VAT or file tax returns. Here are the key sectors that enjoy VAT exemption in UAE:

List of Exempt Supplies in UAE

• Financial Services: This includes life insurance and life reinsurance. It covers financial services where no explicit fee, discount, commission, rebate, or similar consideration is involved. Similarly, financial services delivered to recipients outside the GCC (Gulf Cooperation Council) also enjoy this exemption. Issue, allotment, or transfer of debt or equity instruments is exempt from VAT as well.
• Residential Buildings: Supply of residential buildings other than those specifically zero-rated are exempt from VAT. This means if you are buying a new residential property for your employees, you won’t have to pay any VAT on the purchase price.
• Bare Land: Supply of bare land, i.e., land that is not covered by completed buildings is exempt from VAT. If you are planning to purchase land for future development, you will not be charged any VAT.
• Local Passenger Transport: Local passenger transport services, such as local bus, tram, and taxi rides, are also exempt from VAT.

Partial VAT Exemption

Under specific conditions, a supply might be partly exempt and partly taxable. This usually happens when your business provides a bundle of goods or services, some of which are standard-rated, and others are exempt.

For example, let’s consider that your company sells a package consisting of a training course (standard-rated) and a book (zero-rated). Now, you must distribute the input tax between the taxable (training course) and exempt (book) parts of the supply. This apportionment should be done on a fair and reasonable basis. 

For instance, you can allocate the VAT based on the relative values of the taxable and exempt supplies. If the training course costs AED 1000 and the book costs AED 100, 90% of the VAT would be recoverable.

Which Supplies Are Not Eligible For Input Tax Recovery In The UAE?

As per the UAE VAT rules, all business expenses are not treated the same. There are certain supplies that are not eligible for input tax recovery in the UAE. Knowing which expenses fall into this category is crucial for their accurate accounting treatment. This will help ensure accurate VAT calculations and prevent unexpected tax liabilities.

Entertainment Services Provided to Non-Employees

One such category is entertainment services provided to non-employees. Registered businesses in the UAE cannot claim tax recovery on these expenses. Entertainment services can include hospitality of any kind, such as food and drinks, accommodation, trips for entertainment or leisure, or access to events or trips.

Let’s consider a scenario where you are hosting a product launch event and invite potential clients. You arrange for a lavish dinner and a live music performance. While this event is crucial for your business, the costs associated with the dinner and the music performance are considered entertainment services for non-employees. As such, you cannot claim input tax recovery on these expenses.

Vehicle Used for Personal Errands

If your business has purchased, rented, or leased a motor vehicle primarily for business purposes, but it is also used by employees for personal work, then the VAT paid on the purchase, rent, or lease cannot be recovered. It is important to note that travel between home and the workplace is not considered personal use. So, if an employee uses the company car to commute to work, the VAT can still be recovered.

For instance, let’s consider you have leased a car for your sales team to meet clients. However, the car is also used by team members for personal work, such as grocery shopping or leisure. Then, you cannot claim the VAT paid on the lease.

The following types of business vehicles are not considered available for personal use as per the UAE VAT law: 

• Any taxi licensed by a suitable UAE authority. 
• Any vehicle offered to customers as part of a vehicle renting enterprise.
• Any vehicle registered and used as an emergency vehicle. This can be done by any emergency service such as ambulance or police.

Services Purchased for the Personal Use of Employees

If your business pays for goods or services that employees use, and the employees themselves have not paid for these charges, then you cannot claim input tax recovery on these expenses.

However, there are exceptions to this rule. VAT recovery can be claimed if:

• It is a legal obligation to provide those goods or services under the labor law in the UAE or the Designated Zone.
• It is part of a contract, or there is a documented policy to provide those goods or services so that the employees can perform their roles.
• If the provision of services or goods is a ‘deemed supply’.

Record-keeping for VAT Exemptions in UAE

While claiming VAT exemptions can offer significant benefits for your organization, it also comes with the responsibility of maintaining meticulous financial records. Ensuring accurate and comprehensive record-keeping is not just good practice; it is a legal requirement under UAE VAT regulations.

Your company must retain documents to support VAT exemption status for a minimum of five years. These records should clearly demonstrate why a supply was exempted from VAT. In the event of an audit, they will help establish the validity of the VAT exemptions claimed. The documents include: 

• Invoices
• Receipts
• Documents related to all imports and supplies of services and goods
• VAT returns
• Documents related to services and goods that have been used for matters unrelated to business
• Records of corrections or adjustments made to tax invoices or other accounts
• Documents demonstrating why a supply was exempted from VAT

If your company fails to maintain proper records, or if the records do not adequately support the VAT exemptions claimed, you may be subject to fines and penalties. These include fines ranging from AED 1,000 to AED 20,000, depending on the nature of the violation.

Ongoing non-compliance can lead to legal actions and prosecution initiated by the FTA, including audits, investigations, and additional penalties. In extreme cases, non-compliance can even lead to criminal charges and imprisonment.

Automate Expense Management with Alaan

Maintaining detailed VAT records manually can be a time-consuming and error-prone process. This is where Alaan’s robust expense management software can help. It can categorize expenses and automatically identify exempt expenses. This ensures that exempt supplies don’t accidentally get charged VAT, helping maintain compliance with VAT regulations.

With Alaan, you can automatically categorize each transaction, map bill categories to Dynamics ledgers once, and let the system do the rest. The system can read VAT automatically from receipts and invoices and sync it with accounting tools. This automation significantly reduces the risk of errors and helps ensure compliance with the law.

To learn more about how Alaan can help your business navigate VAT exemption in UAE, schedule a demo today!