FTA Update – VAT Guide issued by FTA for clarity of Apportionment

The UAE’s Federal Tax Authority (FTA) has recently published a comprehensive value-added tax (VAT) apportionment guide aimed at helping diversified businesses correctly categorize expenses between standard rated vs VAT-exempt supplies when claiming input tax deductions.

This guide simplifies the apportionment process significantly while also providing clarity on grey areas to enable maximum legitimate VAT recovery for all registered entities. Let’s understand the key aspects:

Qualifying for VAT Deductions

UAE businesses can recover VAT only on purchase expenses and overhead costs that relate to making taxable, standard-rated supplies.

Where a company deals in both taxable and VAT-exempt supplies, it becomes necessary to segregate expenses systematically between the two categories while filing periodic tax returns.

The new FTA guide aims to:

• Standardize apportionment methods
• Simplify procedures
• Provide computational clarity

This enhances input tax deduction claims for diversified businesses.

Key Aspects of Apportionment

Definitions

• Standard rated – supplies with 5% VAT collected from customers
• Exempt supplies – no VAT charged on these items
• Zero-rated – no VAT charged but input tax recovery allowed

Expense Attribution Bases

Companies need to allocate expenses using appropriate bases like:

• Turnover ratio of standard vs exempt supplies
• Employee headcount or costs handling each activity
• Asset values related to different operations
• Other acceptable allocation metrics

Documentation Requirements

Businesses claiming input tax must retain records justifying their apportionment calculations like:

• Tax invoices of purchases
• Break up and analysis of overhead expenses
• Revenue values across various supplies
• Data validating the attribution percentages

FTA Provided Templates

The guide provides ready annexure formats that simplify compliance requirements.

Audit Risks

Inadequate documentation can lead to denial of input tax refunds and penalties during assessments.

Sector Examples

For better understanding, detailed illustrations are provided across sectors with mixed taxable/non-taxable supplies like:

• Hospitals – pharmacy, lab tests etc are taxable vs healthcare services
• Banks – fee-based services vs financing activities
• Universities – standard education vs R&D, sports activities

Such examples help address industry-specific VAT concerns.

Conclusion

In summary, the new FTA apportionment manual enables organizations with diversified operations to claim maximum eligible input tax deductions conveniently and accurately.

Businesses must thoroughly assess supplies categories, diligently allocate expenses between them using acceptable methods and retain supporting records.

This results in significant cost savings, cash flow benefits, financial control and also reduces tax risks by enhancing compliance.

Seeking expert help where needed is recommended to optimize deductions.

FAQs