Tax Year End adjustments
The deadline for submitting Tax Year End Input Tax Annual Adjustments and Capital Assets Scheme adjustments is approaching for businesses submitting monthly Value Added Tax (VAT) returns in the United Arab Emirates (UAE). The adjustments must be shown in the tax period covering January 2020, due for submission by 28 February 2020.
Businesses submitting quarterly VAT returns should also start preparing their calculations, for submission in the tax return covering the first tax period following their Tax Year End.
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 31 December 2019.
- 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, and an overview of these rules are provided at the end of this alert.
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.
Input Tax Apportionment
i. Provisional Input Tax Apportionment
The amount of residual input tax that is recoverable during the course of the Tax year will be calculated based on either:
- The prescribed calculation in Article 55 of the VAT Executive Regulations (Standard Method)
- Where the Federal Tax Authority (FTA) has approved one of the special methods to be used by the business, as provided by the FTA in its ITA Guide VATGIT1 (revised on 31 December 2019), then this method is to be used
The above calculation has to be performed at the end of each VAT period. The input tax recovered will be provisional and subject to an annual adjustment at the Tax Year End.
ii. Annual Adjustment (wash-up)
At the end of the Tax Year, the Business must revise its provisional input tax apportionment calculations and perform the calculation on an annual basis, in order to compute the actual input tax it was eligible to recover during the year. The result of the annual calculation is compared to the provisional input tax recovery made throughout the year – where there is a difference in the input tax recoverable by the Business an adjustment must be made – “the annual adjustment”. This could result in either additional input tax recovery for the Business, or lead to an additional payment of VAT being due back to the FTA.
The annual input tax apportionment method should also be consistent with the method used as per (i).
This practice is also known as the “Annual Wash-up” and there is no threshold for the adjustment.
Any Business that uses an FTA approved Special Method should also compare the result of the annual recovery rate with the proposed rate at the time of application for the Special Method. Should the difference be more than 10%, the Business must notify the FTA of the difference.
iii. Adjustment For “Actual Use”
Any Business using the Standard Method in (i) should also re-compute its recoverable portion of the residual input tax on an annual basis based on an appropriate “use-based method”, which in practice must be one of the Special Methods outlined in VATGIT1 (revised on 31 December 2019). The method selected for comparison should represent the actual use of the goods or services purchased for either taxable or exempt purposes.
If the comparison to the actual use calculation results in a difference of AED 250,000 in input tax recovery when compared to the result of the annual wash up calculation, the Business must use the actual use calculation as the basis for calculating the annual adjustment due.
Capital Asset Scheme
i. Definition of Capital Asset
Article 57 of Executive Regulations of VAT defines a Capital Asset as a single item of expenditure of the Business amounting to AED 5,000,000 or more excluding VAT, on which VAT is payable and has estimated useful life equal or longer than:
- 10 years for a building or parts thereof; or
- 5 years for other capital assets.
Notwithstanding the above, expenditure consisting of smaller sums which collectively amount to AED 5,000,000 or can be treated as a single item in certain cases.
ii. Capital Asset Adjustments
Under Article 58 of the VAT Executive Regulations, the Business should monitor the input tax recovered and make adjustments over the relevant adjustment period.
The Capital Asset Adjustment will depend on the extent the Business used the capital asset for taxable purposes during the tax year. This could result in an adjustment being required in the VAT return of either additional recoverable input tax, or a reduction in the input tax previously claimed.
iii. Record-keeping requirements
Article 60 of the VAT Decree-Law requires any Business to keep a record (i.e. a Capital Asset Register) related to all Capital Assets for VAT purposes for a minimum of 10 years.
This requirement applies to all Businesses owning assets meeting the definition of a Capital Asset for VAT purposes, irrespective of whether the business makes exempt or non-business supplies.
How Can We Help?
Deloitte has dedicated teams of highly experienced VAT specialists in all of the industry sectors effected by Input Tax Apportionment and the Capital Asset Scheme in the UAE.
We can assist with calculating Input Tax Apportionment annual adjustments, assessing the suitability of Special Methods, supporting with Special Method applications, calculating Capital Asset Scheme Adjustments, and reviewing suitability of Capital Asset Registers. This includes the deployment of specialist proprietary technology for this purpose.