As we are well aware, the VAT (value-added tax) regime came into force on 1st January 2018 in the United Arab Emirates with a 5% VAT applying on the sale and purchase of most goods and services. This led to companies being required to undergo an in-depth review of their accounting process to ensure compliance, and regularly modify this process due to the regular amendment of the VAT laws in the UAE.
Under the UAE VAT law, the input VAT paid for the purchase of capital assets for business purposes can be recovered. A specific scheme - the ‘Capital Asset Scheme’ was designed by the Federal Tax Authority to regulate the input VAT recovery on the larger value of capital assets having long-term usage.
Let’s take a deeper look as to what this scheme is all about:
What is a Capital Asset?
First, let’s start by understanding what constitutes a capital asset. Business assets which are designated for long-term use are called capital assets. For instance, if your company purchases a laptop for official purposes, it is considered as a capital asset of the company. However, if a computer dealer buys the laptop to sell as part of its business, the same laptop is counted as inventory.
Capital Assets Scheme
In the UAE, a taxable person can recover Input Tax on Capital Assets used for business purposes. Designed by the Federal Tax Authority (FTA), the Capital Assets Scheme aims to regulate Input Tax recovery on capital assets. This scheme allows the initially recovered Input Tax to be adjusted based on the actual use during a specific period.
What are those assets that are subject to the Capital Assets Scheme?
A Capital Asset is a single item of expenditure of
the business and amounts to AED 5,000,000 or more excluding tax, on which tax is payable and its useful life is approximately equal or longer than 10 years in case of a building or a part thereof, and 5 years for all Capital Assets other than buildings or parts thereof.
When the
expenditure consists of smaller sums which all adds up to AED 5,000,000 or more, it should be treated as a single item of expenditure of AED 5,000,000 or more for the purposes of this scheme. These small amounts of money should be for the payment for the purpose of buying or constructing a building or for an extension, refurbishment, renewal, fitting out, or other work undertaken to a building. If there were long periods of time in between these activities, then it will be considered as separate expenses and not as a whole. The same rule comes into force when the amount was spent for the purchase, construction, assembly or installation of any goods or immovable property where components are supplied separately for assembly as well.
How can businesses recover Input Tax on Capital Assets?
Under the Capital Assets Scheme, a taxable individual can recover full input tax within the first period of VAT filing, if such a capital asset is intended to be used for business purposes for a specified period. If a taxable person uses such a capital asset for a non-business purpose or for making exempted supplies, the proportionate input tax will be ineligible for recovery and this portion will be reversed.
Recovery of Input Tax on Capital Assets if the Payment is made in Instalments
Under the Capital Assets scheme, a taxable person can recover Input tax on the purchase of capital assets if it satisfies the conditions mentioned in Article (54) of UAE VAT Law.
As per VATP017, a business can recover Input tax in the first tax period if the tax invoice is received and an intention to make the payment of consideration of the supply before the expiration of six months after the agreed date of payment is formed.
In many cases, intention of payment is not formed till the time internal approval for making
payment is not received. Hence, a taxable person can recover input tax when he receive tax
invoice and also internal approval is cleared for payment of consideration. At the time of
recovering input tax, a taxable person shall provide an agreed date of payment to justify
intention of payment. If a taxable person does not pay within 6 months of agreed date, then
they have to revise such recovered input tax and can reclaim such input tax as and when the
outstanding dues are cleared.
Recovery of Input Tax on Capital Assets Other Than Specified in Scheme
A taxable person can recover Input Tax on purchase of capital assets if it satisfies the
conditions mentioned in Article (54) of UAE VAT Law which is defined below:
Article (54) - Recoverable Input Tax
Article (54)(1): The Input Tax that is recoverable by a Taxable Person for any Tax Period is the
total of Input Tax paid for Goods and Services which are used or intended to be used for
making any of the following:
a. Taxable Supplies
b. Supplies that are made outside the State which would have been Taxable Supplies had
they have been made in the State.
c. Supplies specified in the Executive Regulation of this Decree-Law that are made outside
the State, which would have been treated as exempt had they been made inside the
State.
Exemptions
Article (54)(3): The Taxable Person shall not be entitled to recover any Input Tax in respect of Tax
paid in accordance with Clause (2) of Article (48) of this Decree-Law.
Article (54) (4): The Executive Regulation of this Decree-Law shall specify the instances where
Input Tax is exempted from being recovered.
Furthermore, Input tax on capital assets will not be allowed to be recovered if the capital asset is used for:
1. Entertainment services like accommodation, food and drinks not provided in the normal
course of business to anyone not employed, including Customers, Owners and Investors.
2. Motor vehicles purchased, rented or leased, if this is available for Personal Use
Role of MBG Corporate Services
While companies have taken a keen interest in carrying out in-depth audits, system and processing errors have led to heavy penalties by the FTA. It’s always best to entrust your VAT-related computations to the auditing experts at MBG Corporate Services. Our vastly experienced team will analyse your books and records to check and validate your compliance on all levels.
