UAE VAT Law : Understanding Input Tax Adjustments and Annual Washup Calculations

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Understanding input tax adjustments is crucial for businesses operating in the UAE, particularly those dealing with mixed supplies. The FTA has issued a detailed guide on “Input Tax Apportionment” under the UAE VAT Law. 

In this write-up, we provide an overview of the input tax adjustments, eligibility criteria for claiming input tax credit, methods for apportionment, and the annual wash-up process. 

Input Tax Adjustments: 

Businesses operating in the UAE must evaluate and quantify input tax adjustments at the end of the tax year. This includes conducting an annual wash-up calculation to reconcile input tax credits with actual usage. For instance, a retail store that sells both taxable goods and exempt goods would need to adjust its input tax accordingly at the end of the tax year. 

These adjustments must be reported to the FTA while filing the VAT returns and payment due, if any, for claiming excess credit must be paid.

Input Tax Credit – Recoverable/Non-recoverable:

Under the UAE VAT laws, businesses can claim input tax credit for goods and services directly related to making taxable supplies (wholly recoverable input tax). For example, a construction company purchasing building materials for a commercial project can claim input tax credit on those materials. However, input tax incurred on goods and services for exempt supplies, such as domestic transportation of passengers, cannot be claimed as credit (wholly non-recoverable input tax). 

Here, it is pertinent to note that zero-rated supplies are also considered as taxable supplies and are eligible for input tax credit. 

Besides, 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”. It is recoverable as per the input tax apportionment methods provided in the VAT guide. 

Apportionment of Input Tax Credit: 

Businesses involved in mixed supplies must apportion input tax on a provisional basis using approved methods. 

During each tax period, such businesses must provisionally apportion input tax incurred for making exempt supplies. This can be done using either the standard method outlined in Article 55 of the regulations or special methods such as outputs based, transaction count, floorspace, or sectoral methods. However, the use of special methods requires prior approval from the FTA. These provisional apportionments are reported in VAT returns for each tax period leading up to the tax year end. 

At the conclusion of the tax year, businesses conduct an annual wash-up calculation to revise the provisional input tax amounts in the prescribed manner. This process aims to derive the accurate annual apportioned input tax amount recoverable in case of mixed supplies. Any disparities between the provisional amounts and the annual calculation must be addressed through adjustments in the VAT return immediately after the tax year end. Such adjustments may involve either repaying previously claimed input tax to the FTA or increasing input tax recovery. 

Conclusion: 

Effectively managing input tax adjustments is critical for businesses in the UAE to remain compliant with VAT regulations and optimize financial performance. By understanding eligibility criteria for claiming input tax credit, implementing appropriate apportionment methods, and conducting the annual wash-up process diligently, businesses can mitigate risks and avoid potential penalties. 

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