The VAT law in the UAE allows registered businesses to claim an input tax credit against the tax paid on the purchase of eligible products and services. However, the Federal Tax Authority (FTA) has listed certain expense categories as Non-Recoverable Input VAT. For example, VAT paid on entertainment expenses. The input VAT paid on these expenses cannot be claimed. This article will discuss everything related to Non-Recoverable Input VAT, focusing mainly on Non-recoverable tax on entertainment and different details concerned with it.
What are Non-recoverable taxes in the UAE?
Under the UAE’s VAT system, all VAT-registered companies have the option to recover the VAT paid on purchases made to produce taxable supplies. This provision allows them to redeem the tax paid for the purchases against the VAT charged for their sales, thereby reducing the overall tax burden and the amount that needs to be paid to the government. However, there are some exceptions to this particular law. The VAT paid on certain expenses cannot be claimed, and there are two situations to it –
- The nature of the expense – Expenses made on entertainment services in the UAE are non-recoverable, regardless of their usage in the business.
- The use of the expense – In some circumstances, the specific use of reclaimable expense can result in the VAT becoming non-recoverable. For example, purchasing a car for the company and using it for personal reasons.
Here are some examples of Non-Recoverable expenses in the UAE:-
Entertainment services
According to the VAT rules, taxes paid on entertainment expenses are non-recoverable. That means it cannot be claimed. For example, extravagant meals, tickets to sports events, fun activities for employees or clients, hotel accommodation services, food, and drinks that are unrelated to the business. The other exceptions may include:-
- Services that are part of a contractual obligation
- Food and drinks offered during the normal course of business meetings, such as lunch served to potential customers after the meeting, at the same venue.
Personal use of vehicles
Under the UAE VAT Law, a motor vehicle is a road vehicle used for the transportation of 10 or fewer persons, including the driver. This means it would exclude vehicles like trucks, forklifts, hoists, and other similar vehicles. Nevertheless, the VAT treatment on motor vehicles will depend on their usage. For instance, if the company car is used solely for business purposes, the VAT is recoverable on its purchase and maintenance expenses, whereas if it is purchased for business purposes but used by employees to run personal chores, the VAT would be non-recoverable.
However, there are still certain exceptions where the company vehicle will not be treated as for personal use:
- Licensed taxis – Taxis licensed by a competent authority within the UAE
- Emergency vehicles – Emergency vehicles used by police, fire departments, ambulances, or similar services
- Rental vehicles – Vehicles used in a car rental business and rented out to customers
Employee expenses
According to UAE VAT rules, the tax is non-recoverable on those goods and services that are purchased for the employees, but they have not paid any charges for them. In simple words, if the company incurs expenses for the personal benefit of employees, the VAT paid on those cannot be claimed. For example, gym membership.
Nonetheless, there are certain exceptions to this regulation. If the purchased product or service is to be used by employees for no charge but is directly related to the business, it would be considered a recoverable VAT. For example,
- Legally mandated benefits –If the company is legally obliged to provide certain goods or services under the UAE or Designated Zone labor laws
- Contractual policy –Expenses that are mentioned in a contract or company policy that encourage employees to perform their duties efficiently
- Deemed supplies –In some scenarios, the goods and services provided to the employees would be considered a deemed supply under the UAE VAT laws
Non-recoverable tax on entertainment
The Federal Tax Authority (FTA) issued a new law regarding the treatment of input tax on entertainment-related expenses, whether they are recoverable or non-recoverable. The Non-recoverable tax on entertainment services in the UAE is explained in Article 53 of Cabinet Decision No. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (“VAT Executive Regulations”).
According to this law, VAT paid on any expenses that were incurred for a genuine business purpose, including those incidentals to a business purpose would be subject to normal VAT recovery rules. However, if the hospitality services provided by the company are to attend an event, then such expenses would be classified under Non-recoverable tax on entertainment services in the UAE.
List of non-recoverable entertainment expenses
The costs incurred on the following are not recoverable –
- Entertainment provided to non-employees
If an individual or company provides entertainment services to anyone not employed by them such as customers, officials, shareholders, other owners, or investors.
- Employee entertainment
When events are held for the purpose of entertaining staff, such as office parties, then the cost incurred would be classified under Non-recoverable tax on entertainment. Similarly, when taxable entities purchase goods or services to give away for free to the staff or reward them for long service, then VAT paid on such expenses would also be Non-recoverable. For example, Long Service Awards, retirement gifts, gifts for different festivals or special occasions like weddings or the birth of a child, Employee of the Month rewards, or a dinner to reward service.
According to Article 53, the following expenses would be listed under recoverable taxes –
Business meetings
The VAT paid on hospitality services offered during a business meeting is recoverable, such as food and refreshments. However, there is a specific criteria:-
- The services are provided at the same venue as the meeting
- If the meeting is interrupted for a short break like lunch break and then resumed as normal
- The cost per head of the hospitality services does not exceed any internal policy established by the business around employee subsistence claims
- The food and beverages offered as hospitality service are not accompanied by any form of entertainment such as a motivational speaker, a live band, etc.
Conference and business events
For the catering services provided during conferences and business events, the VAT treatment would depend on whether any fee is charged from the attendees
- If the fee is charged, the input tax is recoverable.
- If no fee is charged, the input tax is not recoverable.
Entertainment provided to employees
When employees are provided goods and services free of cost and for their personal benefit, then the VAT incurred on such expenses would be a non-recoverable tax on entertainment. However, there is an exception that applies. The taxable entity is entitled to recover VAT on these costs if,
- it is a legal obligation to provide those services or goods.
- it is a documented policy.
- it is a deemed supply under the provisions of the Decree-Law.
Employee expenses
When a company funds an employee for incurring expenses for business purposes, the VAT on such expenses would be recoverable. For instance,
- When an employee is on a domestic business trip and requires overnight accommodation
- Expenses done by the employee on food and drinks for their own consumption during the business trip
However, if the employee incurs costs for entertaining a customer or supplier, then taxes paid on such costs would be non-recoverable.
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