UAE Tax Year End adjustments
The deadline to submit Tax Year End adjustments is approaching for businesses in the United Arab Emirates (UAE) who submit quarterly returns and have a Tax Year End of February or March 2020.
For businesses with a Tax Year End of February 2020, the adjustments must be shown in the VAT return for the quarterly tax period ending May 2020, due for submission by 28 June 2020.
For businesses with a Tax Year End of March 2020, the adjustments must be
shown in the VAT return for the quarterly tax period ending June 2020, due
for submission by 28 July 2020.
Who is this alert for?
Any business that is making both taxable and exempt supplies in the UAE and any business that owns a capital asset for VAT purposes. More specifically, we
would expect this alert will be of particular interest to those businesses
which have a Tax Year End of 29 February 2020 or 31 March 2020.
At the end of its tax year, the business is required to compute and make the
following input tax adjustments for the year:
- Annual adjustment (wash-up)
- Adjustment for “actual-use” (where the standard method was used for apportionment during the tax year)
- Capital asset scheme adjustment
The above adjustments should be reported in the VAT return relating to the first
tax period following the Tax Year End.
Input tax apportionment
A business is entitled to recover input tax incurred on goods and services that
are used or are intended to be used for making taxable supplies.
Accordingly, where purchases are directly connected to exempt supplies or non-business activities, then the input tax is not recoverable.
Any business which incurs input tax for making both taxable and non-taxable supplies (known as “residual input tax”) is required to calculate the proportion of input tax it is eligible. This is known as input tax apportionment. Provisional Input Tax Apportionment calculations are required to be made during the year, which must then be revised based on annual figures at the Tax Year End. Detailed methodologies are specified for this purpose.
Businesses which make a mixture of taxable and exempt supplies should ensure they are prepared with the necessary data to complete these detailed calculations in time to include the relevant adjustment in the VAT return for the first tax period following the Tax Year End.
Capital assets scheme
Many businesses fail to note the connection between the input tax apportionment annual adjustment and the requirement to complete a capital
assets scheme adjustment. The two are interconnected and due to be made at the same time each year, which applies to assets of a certain value and on which VAT was incurred on purchase.
Given that VAT was introduced on 1 January 2018, many businesses are facing their first requirement to calculate a capital assets scheme adjustment this year.
When a business acquires or constructs a capital asset, the input tax is recoverable in the year of acquisition, subject to the input tax apportionment rate mentioned above.
However, given the long useful life of large value assets, businesses are required to monitor the usage of the capital assets for taxable purposes over time. This results in yearly adjustments to the original input tax recovery being due for the useful life of the asset.