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VAT Public Clarification – Non-Recoverable Input Tax

August 13, 2018

Non-Recoverable VAT in respect of entertainment or hospitality of any kind

Entertainment provided to non-employees is not recoverable.

Input Tax shall be non-recoverable if it is incurred by a person in respect of entertainment services provided to

  • customers;
  • potential customers;
  • officials; or
  • shareholders, or other owners or investors.

Entertainment provided to employees may be recoverable only where there is a legal or contractual obligation, or it is deemed supplies.

The clarification provides several examples:

VAT recoverable

A. Where a new employee joins a business and is provided with hotel accommodation for a short initial period prior to finding their own accommodation, this would not be considered entertainment and the VAT incurred on such costs would be recoverable, as this cost is necessary for the person to perform his assigned job.

B. Conference and Business events-Where a fee is charged and VAT is accounted on the same, the input tax incurred on catering services would be recoverable on the basis that the expense is attributable to making taxable supplies.

C. Expenses which are incidental to a business purpose e.g. food and drink provided during a business meeting shall be recoverable (subject to normal VAT recovery rules);

  • the hospitality is provided at the same venue as the meeting;
  • if the meeting is interrupted, only by a short break for the provision of the hospitality and then resumes as normal e.g. a lunch break;
  • the cost per head of providing the hospitality does not exceed any internal policy the business normally has in place around employee subsistence claims, where available; the food and beverage provided is not accompanied by any form of entertainment e.g. a motivational speaker, a live band etc

D. Sundry office expenses-The FTA considers that certain normal incidental office expenses for general use by both employees and visitors does not give rise to non-recoverable input tax.

Sundry Office Expenses include:

  • tea and coffee available in the office or provided during meetings for general use by employees and non-employees for no charge;
  • flowers for display in receptions, offices or for decoration during special events;
  • dates, chocolates, or equivalent snacks which may be available in the office or during meetings for general use by employees and non-employees for no charge.

E. Employee expenses-There will also be circumstances where a taxable person will fund or reimburse an employee for certain costs which the employee incurs for business purposes, in the course of performing their role. Few examples given by FTA are as mentioned below:

  • Where an employee is on a domestic business trip and requires overnight accommodation, the VAT incurred on e.g. hotel costs; or
  • Input tax incurred on subsistence costs e.g. food and drinks purchased by the employee for their own consumption during the business trip.
  • If the employee incurs costs which are related to entertaining a current/potential customer/supplier then any associated input tax incurred will be non-recover
VAT Non-Recoverable

A. Organizing a lunch or dinner for employees e.g. a Ramadan Iftar, Staff Parties this would be considered to be entertainment and the VAT incurred on such costs would be blocked from recovery.

B. Gifts given away free of charge includes:

  • long service awards;
  • retirement gifts;
  • Eid gifts, or gifts for other festivals or special occasions;
  • gifts given on the occasion of a wedding or birth of a child;
  • employee of the month gifts; or a dinner to reward service.

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