The time frame for recovering Input Tax in the UAE

The Federal Tax Authority of the UAE (FTA) published a new VAT Public Clarification (VATP017) which provide an interpretation of the time-period within which the VAT on expenses (input tax) must be recovered, and what are the alternative solution if it is not recovered in time.

Generally, businesses and individuals registered for VAT in the UAE are entitled to recover VAT on their business expenses used in selling taxable goods and services, with few restrictions as per the general recovery rules in addition to the time-frame restrictions which are discussed herewith.

What are the conditions for recovering VAT?

A registered business can recover VAT on purchases in the first tax period in which both of the following conditions are met:

• A valid tax invoice is received and retained
• The invoice has been paid or intended to be paid within six months from the due date

The intention of payment

Receiving a valid tax invoice for purchased goods or services is not enough to recover the associated Vat. An intention to pay the invoice must be formed in the relevant tax period.

The intention of payment, practically, can translate to the business’s internal approval process to pay suppliers.

Therefore, where a tax invoice is received in one tax period and the payment is approved in a later tax period, the VAT can only be recovered in that later tax period.

Example

ABC trading LLC purchased goods and received an invoice during the tax period from April to June 2020. According to their approval process, the finance department approved the payment in July 2020. ABC can only recover the VAT in the tax period from July to September 2020 where the intention to pay is formed (the approval), and not in the tax period where the transaction is happened and the invoice is received.

If the payment is not made within 6 months of the due date, or if the intention to pay is changed, the VAT claimed must be reversed in the first tax period after the end of the 6 months period.

VAT not recovered in time

Where the input tax is not recovered in the tax period in which both the conditions are satisfied, the business can recover it in the immediate next tax period.

If input tax is not recovered in the two tax periods, the only recovery option available is to submit a voluntary disclosure to amend the input tax reported in the VAT return of one of the two tax periods.

It should be noted that a voluntary disclosure fee will apply at a rate of AED 3000 for the first time and then 5000 for each disclosure thereafter.

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For a detailed discussion on various aspects of this Public Clarification, please contact us.