Non Recoverable Input Tax – Goods or Services purchased for use by Employees
Under Article (52) and (53) of Cabinet Decision No. (52) of 2017 on the Executive Regulations of the Federal Decree-Law No (8) of 2017 on Value Added Tax there are certain expenses which are not eligible for Input tax recovery. Let us understand the nature of how non recoverable inpux tax on goods and services purchased for use by employees works:
Registered businesses cannot claim input tax recovery paid on goods and services purchased for use by employees on which charge is not paid by the employees and it is for their personal benefit.
As per the recent public clarification, any entity including the designated government entities which provide the entertainment services to the employees are prevented from recovering any VAT included on such costs.
Exceptions to the above:
Input VAT recovery can be claimed on such goods and services purchased for use by the employees only in the following cases:
Where it is a legal obligation to provide the goods or services under an applicable labour law in UAE or the Designated Zone.
Where it is a contractual obligation or documented policy to provide the goods or services for the employees to perform their role and it can be proven to be a normal business practice in the course of employment.
Where the provision of goods or services is a deemed supply.
For example: Where a new employee joins a business and is provided with hotel accommodation for a short initial period prior to finding their own accommodation, this would not be considered entertainment and the VAT incurred on such costs would be recoverable, as this cost is necessary for the person to perform their role.
However, where a business organizes a lunch or dinner for employees e.g. a Ramadan Iftar, this would be considered to be entertainment and the VAT incurred on such costs would be blocked from recovery.
For example: MNR company purchased gym equipment for use by its employees. The equipment is made available to employees as part of their employee benefits and is free of charge. VAT paid on purchase of the gym equipment is AED 2,000. MNR Company is not eligible to claim input tax recovery on this purchase as the gym equipment is purchased for use by its employees.