FTA publishes Public Clarification on the VAT treatment of labour accommodation

The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a new Public Clarification on the Value Added Tax (VAT) treatment of labour accommodation. This is to be welcomed as it is an issue on which there have been a number of differing views as to how the law should apply. The Clarification by the FTA should assist businesses with adhering to their compliance obligations in this regard.

VATP003 – VAT Public Clarification on labour accommodation: residential versus serviced property

VAT Public Clarification VATP003 discusses the VAT treatment of labour accommodation. The issue addressed in the document is whether a supply of labour accommodation is considered to be a supply of a residential building (and is thus zero-rated on the first supply and exempt thereafter), or if it is considered to be the supply of serviced accommodation (and thus standard-rated).

According to the Public Clarification, if services are provided in addition to the labour accommodation which are considered incidental to the supply of accommodation, it will not be considered a serviced accommodation.

Such incidental services include the cleaning of communal areas, maintenance for general upkeep, security, and utilities. These are services which are basic and considered necessary and generally integral to providing the supply of the residential building.

On the other hand, supplying non-incidental services in addition to the core labour accommodation would, in the view of the FTA, cause the accommodation to be considered a supply of serviced accommodation. The services envisaged here appear to go above and beyond the basic provision of a residential property, and include the supply of some or all of telephone and internet access, cleaning of rooms, laundry services and the changing of bed linen.

Essentially, it appears that the FTA have taken the view that services which are incidental to providing the residential building will not cause it to be considered to be a supply of serviced accommodation, while services which are in addition to these will cause it to be considered a serviced accommodation, and thus standard rated.

The document also discusses the FTA’s views on the differences between a single composite supply and a mixed supply. It is of interest to consider this analysis as this is an area that often causes problems for business as, in the case of a single composite supply, the entire consideration is subject to the VAT treatment of the principal component, whereas in a mixed supply, each component must be valued and a VAT treatment applied to it.

The Public Clarification makes clear that one criteria that the FTA will consider to be crucial is that a single composite supply must have all components supplied by a single supplier. If the components come from multiple suppliers, it will not be treated as a single composite supply, and the tax treatment of each component must be individually evaluated.

In practical terms, business are still likely to have some difficulty with the practical application of this criteria, particularly where existing agreements do not cater to that level of detail, and where a supplier of labour accommodation may supply it plus all the ancillary services to an independent employer which then supplies the accommodation to its staff.  As a result, it would still be beneficial for business to obtain informed assistance from advisors as to how this Clarification should be applied in their particular circumstances.