Guide to Input Tax Apportionment

As we know, VAT is a general consumption tax on the supply of goods and services, that applies to most supplies which take place within the territorial area of the UAE. But there are cases where the standard input tax-based apportionment method does not yield a fair and reasonable result.

Entitlement to recover input tax

A taxable person is entitled to recover input tax incurred on the purchase of goods and services where certain conditions are met. Thus, the recovery of input tax will be permitted where acquired goods and services are used, or intended to be used, in making any of the following:

• Taxable supplies;
• Supplies that are made outside the UAE which would have been considered taxable had they been made in the UAE; and
• Supplies of financial services which would have been treated as exempt if made in theUAE, but which are provided to a person who is outside the UAE at the time of the supply, and the services are treated as taking place outside the UAE.

Input tax apportionment per tax period

Input tax which is incurred in respect of goods or services which are used partly for making supplies that allow for VAT recovery and partly for other purposes for which VAT is not recoverable is referred to as “residual input tax”. In such cases, Recovery is restricted to the portion relating to supplies that allow for VAT recovery.

In order to find out the amount of recoverable input tax, some calculations need to be performed:

1) Segregate the input vat into 3 parts

2) The next step is to determine the extent to which input tax may be recovered in respect of the residual input tax??

The standard method for apportioning the residual input tax is provided in Article 55(6) of the Executive Regulation and is calculated as follows:

a/a+b * 100/1???

Where:

? a = Wholly recoverable input tax

? b = Wholly non-recoverable input tax

3) The recoverable portion of the residual input tax is calculated by multiplying the total value of residual input tax by the percentage calculated under the step above.

4) To calculate the total recoverable input tax for the tax period, the recoverable portion of the residual input tax shall be added to the fully recoverable input tax determined under step 1.?

?total recoverable input tax = the recoverable portion of the residual input tax + fully recoverable input tax

This calculation is required to be performed for each period in which the taxable person incurs input tax relating to the making of exempt supplies, or to activities that are not in the course of business.

Input tax apportionment – Annual Adjustments

Registrants are required to perform two additional calculations at the end of each tax year.

1)?Annual washup calculation

2)?Actual Use adjustment.

Annual washup

At the end of the registrant’s tax year, the person is required to perform an annual wash-up calculation as follows:??

Step1:

Combine the input tax recovered during each of the tax periods

Step 2:

Recalculate recoverable input tax

Step 3:

Deduct the total recoverable input tax calculated in step 1 from the amount calculated in step 2 to calculate the annual washup adjustment.

Based on the above, the annual washup adjustment is calculated as the difference between the recoverable residual input tax per the returns submitted and the recoverable residual input tax per the annual calculation.

Actual use Adjustment

The registrant is only required to make an actual use adjustment if the difference between these amounts is more than AED 250,000.

The registrant is required to calculate the difference between the recoverable input tax per the annual washup calculation and the input tax which would be recoverable if an apportionment ratio which reflects the actual use of the goods and services to which the input tax relates was used.

Alternative input tax apportionment methods

The FTA accepts that the standard method of input tax apportionment may not be appropriate for the particular situation of every registrant. In such cases, registrants may apply for an alternative method of input tax apportionment to be used

Special Apportionment Methods

1)?Outputs-based Method

The outputs-based method determines the apportionment percentage for residual input tax on the basis of the types of supplies made by the taxable person.

2)?Transaction Count Method

The transactions count method determines the apportionment percentage based on the number of taxable transactions as a proportion of all transactions carried out by the business during the period

3)?Floorspace Method

The floorspace method determines the apportionment percentage for residual input tax by identifying the proportion of the floorspace used for taxable activities as a percentage of the total floorspace used by the business, excluding areas used for both taxable and non-taxable purposes.

4)?Sectoral Method

To ensure that the apportionment method is as tailored as possible for each of the distinct business divisions, such businesses may apply for a “sectoral” method of input tax apportionment. In addition to being used for different divisions of the same entity, this method can also be used by different entities which are members of the same tax group.

5) Headcount Method

The headcount method uses the full-time equivalent (FTE) of staff (usually income generating only, not back office) employed or used in each sector.

6) Outputs Method

The outputs method is best used where expenses are linked to income. The amount of income in the sector may therefore be reflective of the input tax on expenses.

????????????Thus there are number of input tax apportionment methods, incurred on the purchase of goods and services. Professionals of RVG Chartered Accountants can assist you in your Input Tax Apportionment.