Companies who are seeking to reduce their tax obligations can easily do so by learning how to recover input VAT on employee expenses in the UAE.
The Federal Decree-Law No. 8 of 2017 on Value Added Tax states that taxable businesses who are registered for VAT in the UAE can recover some of the input tax they incur on business expenses. To do this, expenses must have been incurred for business purposes, as well as through the ordinary or normal course of business.
A sub-category among these business expenses that are input-tax recoverable are those that are incurred for business employees. That is, whatever input tax your company pays on employee expenses can be recovered from the Federal Tax Authority (FTA) provided there is an invoice or any other document showing that an input tax has been paid.
In this article, we will highlight 7 situations where you can recover input VAT on employee expenses in the UAE.
We’ll cover:
- Seven VAT-recoverable employee expenses in the UAE
- Employee expenses exempt from input VAT recovery
- How to recover input VAT on employee expenses
Seven kinds of input VAT that can be recovered from employee expenses in the UAE
Input VAT in the UAE is payable on taxable goods and services purchased by individuals and businesses in the country.
However, in certain situations, the law allows businesses to recover any input VAT paid on certain expenses.
Below are seven employee-related expenses that qualify for input VAT recovery in the UAE:
1. Conveyance expenses
There are situations when employers promise (in the employment contract) to pay employees’ cost of transportation from their homes to the office and back.
Because these conveyance expenses enable the employees to perform their duties in the ordinary course of the business, the input VAT paid on them can be recovered.
2. Visa Expenses
The cost incurred by an employer for processing a visa for an expat worker is also subject to input VAT recovery.
Just like the conveyance expenses, visa expenses are essential (as per legal regulations) to the performance of the employees’ duties since they cannot work in the UAE without it.
3. Medical Insurance
Dubai’s Law No. 11 of 2013 and Abu Dhabi’s Law No. 23 of 2005 made it mandatory for employers in these two emirates to provide health insurance for employees.
Expenses incurred on providing health insurance for employees qualify for input VAT recovery.
4. Capital expenditure
In the same way, when service or professional companies like law, accounting, and management consulting firms purchase office equipment for employees (say chairs and desks), they can recover the input VAT they pay on such capital expenditures.
5. Petrol expenses
When an employee is responsible for delivering goods to a customer or conducting a business trip, the cost of fuelling a company or personal vehicle is input-VAT recoverable.
However, if any part of the fuel is used for personal purposes, the cost must be separated between business use and personal use. Only the input VAT related to the business (known as residual input VAT) will qualify for recovery.
6. Entertainment provided during business meetings
Where food and drinks are provided for the entertainment of any stakeholder (employees, customers, owners, suppliers, clients, etc.) during a meeting within the business premises, the input VAT is recoverable.
However, input VAT cannot be recovered if the entertainment takes place outside of a meeting and outside of the company’s premises.
7. Mobile phone packages (phones, airtime, and data)
The input VAT on the amount spent by an employee on mobile phone packages can be recovered provided that the company issues and enforces a strict policy that makes those packages usable only for business purposes.
Without such a policy, input VAT on mobile phone packages cannot be recovered.
Employee expenses exempt from input VAT recovery
It’s also important to identify employee-related expenses that are exempt from input VAT recovery.
This will prevent employers from wasting time applying for VAT recovery that is doomed to be rejected.
Below are situations where input VAT on employee expenses are exempt from recovery:
- Food and drinks outside of a business meeting and outside of business premises
- Other entertainment expenses: If the company sponsors employees for a show, concert, night-out, or any other such events, the input VAT paid on such expenses are not recoverable.
- Mobile phone packages where there is no enforcement of strict business-use-only policy
- Goods or services purchased for employees’ personal use: If the company pays for a motivational speaker or buys gym equipment to improve the wellbeing of employees, the associated costs are not input-VAT recoverable. These can only qualify for input VAT recovery if the company has a binding contractual obligation to provide them and it is consistent with company policy to provide such.
- Motor vehicles purchased for personal use: Input VAT on motor vehicles purchased by the business but used for personal purposes by employees cannot be recovered.
- Portion of petrol expenses used for personal journeys.
How to recover input VAT from employee expenses in the UAE
To recover input VAT, there must be a tax invoice or other document that shows that input VAT has actually been paid on a relevant employee expense.
To recover input VAT in the UAE, you must submit an application to the FTA for the relevant expense. Once the recovery has been approved, you can deduct it from the output tax payable to the FTA.
As should be evident by now, a successful input VAT recovery application depends on your ability to keep track of employee expenses and the necessary documentation verifying such transactions.
[Do you want to efficiently manage your employee expenses in order to effectively process input VAT recovery? Sign up for the NOW Money digital payroll platform and enjoy all the benefits of this smart, flexible, and effective payroll management platform.]
Takeaways
- Taxable businesses who are registered for VAT can reduce their tax obligations by recovering input VAT paid on goods and services used in the ordinary course of business.
- Goods and services that qualify for input VAT recovery include employee expenses like conveyance expenses, visa expenses, medical insurance expenses, capital expenditure, petrol expenses, entertainment provided during meetings, and mobile phone packages.
- Goods and services used for the personal benefit of employees and for which the company does not have any contractual obligation, are, however, excluded.
- To recover input VAT, there must be an invoice or other documentation that shows that input VAT has been paid on a particular expense.
