Highlights on Non-recoverability of input Tax credit on entertainment serivice

Key Highlights

Non-Employee Expenses

  1. Designated Government entities which are specified in a cabinet decision will be able to take the input tax credit of the entertainment services provided to non-employees. For example: Meetings with delegates of other countries, meetings with other government representatives, ceremonies held to mark significant political events etc.
  2. Input tax credit shall be non-recoverable if it is incurred for a non-employee by a VAT registrant other than a Designated Government Entity for entertainment or hospitality services such as accommodation, foods and drink not in the normal course of the meeting, access to shows or events etc.
  3. Entertainment or hospitality services provided in the normal course of a meeting shall be classified as a regular business expense subject to recoverable input tax credit. For example: food or refreshments provided during the course of the meeting. However, where the hospitality provided becomes an end in itself and could be construed as an encouragement for attending an event, such costs shall be considered as entertainment in nature and VAT incurred shall not be recoverable.
  4. Recoverability of input tax in respect of costs incurred for catering services during conferences and business events would be dependent on whether any fees is charged from the attendees for such services provided. Where a fee is charged, and VAT is accounted on the same, the input tax incurred shall be recoverable on the basis that the expense is attributable to making taxable supplies. Where no fees is charged, such input tax credit shall be blocked under Article 53(1)(a) of the UAE VAT Executive Regulations. Where the business cannot establish or is uncertain whether or not the hospitality services is provided in the normal course of business meeting, it should refrain from recovering input tax on the expenses.

 

Employee Expenses

  1. Where goods or services are purchased by any taxable person to be used by employees for no charge to them including the provision of entertainment services such input tax credit is not recoverable as per Article 53 of the UAE VAT Executive Regulations. The taxable person shall be able to claim the input tax credit only as per Article 53(1)(c) when there is a legal obligation or a contractual obligation or a documented policy to provide such goods or services to the employees in the normal course of business. For example: provision of hotel accommodation to a new employee. Alternatively, lunch or dinner for the employees in the form of Ramadan Iftar shall be construed as an entertainment service subject to non-recoverable input tax credit.
  2. Incidental business expenses for general use by the employees and visitors shall not give rise to non-recoverable input tax under Article 53. For example: tea and coffee available in office provided during meetings, flowers for display in reception, snacks available in office during meetings or general use.
  3. Events held purely for the purpose of entertaining staff, the VAT incurred on such associated costs shall be blocked from recovery unless a charge is made to employees for attending. Goods or services given free of cost to staff in the form of long service awards, retirement gifts etc, the VAT incurred on such costs should be blocked from recovery.
  4. Reimbursement of employee expenses on costs incurred by the employees for business purposes in the course of performing their role shall be recoverable. In such cases, the costs are considered to be genuine business expenses and VAT incurred is recoverable where a tax invoice is provided, and the cost is for business purposes. For example: Reimbursement of domestic business trips, input tax credit on foods and drinks purchased by the employee for their own consumption during the business trip. If such costs are incurred related to entertaining a current or a potential customer, then any associated input tax shall be non-recoverable.