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Economic Substance Regulations

Non-recoverable input VAT on entertainment services

The expenses relating entertainment services are not claimable for input tax credit. Let us see what constitutes entertainment of staff or business contacts as opposed to expenses incidental to business which would be recoverable under normal VAT rules.

  • Entertainment services are defined under Article 53(2) of the Executive Regulations as “hospitality of any kind” including the provision of accommodation, foods or drinks which are not provided in the normal course of business-like access to shows, events or trips which are provided for the purpose of pleasure or entertainment.

Generally, any costs incurred which are used for genuine business purpose or which are incidental to a business purpose will be recoverable. But when hospitality provided becomes an end in itself and can be construed as the purpose of attending an event, such costs will be considered as entertainment in nature.


For all VAT registrants (Except Designated government entities):

Input Tax shall be non-recoverable if it is incurred by a person in respect of entertainment services provided to anyone not employed by the person including customers (existing or potential customers), suppliers, shareholders, other owners and investors.


Entertainment provided to employees:

Good or services provided to employees free of charge for their personal benefit will not be recoverable unless an exception applies. The only circumstances in which a taxable person is entitled to recover VAT on such costs are:

  • where it is a legal obligation under any applicable labour law in the UAE
  • it is a contractual obligation or documented policy in order that they may perform their role
  • it can be proven to be normal business practice in the course of employing those people
  • where the provision of goods or services is a deemed supply under the provisions of the Decree-Law


Examples to look into for better understanding :

  • Where a new employee joins a business and is provided with hotel accommodation for a short initial period, 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.
  • Business organizes a lunch or dinner for employees, a Ramadan Iftar, this would be considered to be entertainment and the VAT incurred on such costs would be blocked from recovery.
  • Where simple hospitality is provided in the normal course of a business meeting, where simple food and refreshments are provided during the course of a meeting, the cost is considered to be recoverable.


Simple hospitality provided in the normal course of business is recoverable. The following criteria are indicative of simple hospitality provided during a business meeting:

  1. The hospitality is provided at the same venue as the meeting
  2. if the meeting is interrupted, only by a short break for the provision of the hospitality and then resumes as normal e.g. a lunch break
  3. the cost per head of providing the hospitality does not exceed any internal policy the business normally has in place around employee subsistence claims, where available
  4. the food and beverage provided is not accompanied by any form of entertainment, a motivational speaker, a live band etc.


Conference and business events:  

  • Where a fee is charged from the attendees and VAT is accounted on the same, the input tax incurred on catering services would be recoverable on the basis that the expense is attributable to making taxable supplies

Where no fee is charged from the attendees, the input tax related to catering services will be blocked as this situation will fall within the scope of Article 53(1)(a) of the Executive Regulations.


Where the business cannot establish or is uncertain whether or not hospitality is provided in the normal course of business meeting, it should refrain from recovering input tax on the expenses.

    • The FTA considers that certain normal incidental office expenses for general use by both employees and visitors does not give rise to non-recoverable input tax. Examples of sundry office expenses on which the FTA accepts a business should be entitled to input tax recovery include:
      • tea and coffee available in the office or provided during meetings for general use by employees and non-employees for no charge
      • flowers for display in receptions, offices or for decoration during special events
      • dates, chocolates, or equivalent snacks which may be available in the office or during meetings for general use by employees and non-employees for no charge


Where events are held purely for the purposes of entertaining staff, for example staff parties, the VAT incurred on the associated costs shall be blocked from recovery unless a charge is made to the employee for attending.


Examples of the type of gifts given away free of charge on which VAT recovery would normally be prevented (unless the business accounts for a deemed supply) would include long service awards, retirement gifts, EID and other festival gifts, gifts given on occasion of marriage or birth of child, employee of the month gifts, dinner to reward service.


There will also be circumstances where a taxable person will fund or reimburse an employee for certain costs which the employee incurs for business purposes, in the course of performing their role. In such cases, the costs are considered to be genuine business expenses and the VAT incurred is recoverable where a tax invoice is provided and the cost is for business purposes. Example:

  • where an employee is on a domestic business trip and requires overnight accommodation, the VAT incurred on e.g. hotel costs; or
  • input tax incurred on subsistence costs, food and drinks purchased by the employee for their own consumption during the business trip.


If the employee incurs costs which are related to entertaining a current/potential customer/supplier then any associated input tax incurred will be non-recoverable.


Why choose Spectrum Auditing?

Spectrum Auditing team is well equipped to be able to advise and take care of your requirements of Value Added Tax (VAT) Compliance. Our passion and heart lie in serving the clients and we aim at utmost client’s satisfaction. We are registered Auditors under the Ministry of Economy UAE and also registered Tax Agent from Federal Tax Agency UAE, Dubai providing dedicated Audit, Accounting, Tax services, Financial Advisory and Business Advisory Services complying regulatory requirements.


Reach us to have a frills free life in your journey in UAE. We at Spectrum will assist you in taking care of all the procedures involved in the VAT process. Call us today for any kind of assistance at +971 4 2699329 or email us at [email protected] to get all your queries addressed. Spectrum is your partner in your success.



Balaram Vuchidi

Managing Director
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[email protected]
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