What is Input Tax Apportionment?
Input tax apportionment refers to the process of dividing input VAT (Value Added Tax) between taxable and non-taxable supplies in accordance with UAE VAT laws. Businesses in the UAE that incur VAT on expenses must determine how much of that VAT can be recovered based on the nature of their business activities.
Why is Input Tax Apportionment Important?
- Ensures accurate VAT recovery and compliance with the Federal Tax Authority (FTA) regulations.
- Prevents over-claiming of VAT refunds, which could lead to penalties.
- Helps businesses allocate expenses correctly between taxable, exempt, and out-of-scope supplies.
When is Input Tax Apportionment Required?
A business must apply VAT apportionment when:
- It incurs VAT on purchases related to both taxable and exempt supplies (e.g., financial institutions, real estate businesses).
- Certain expenses are used for both business and non-business purposes (e.g., utilities in mixed-use properties).
Categories of Supplies for Apportionment
- Taxable Supplies (Standard & Zero-Rated) – VAT can be fully recovered.
- Exempt Supplies – VAT cannot be recovered.
- Mixed-Use Expenses – VAT must be apportioned based on a fair and reasonable method.
FTA Guidelines on VAT Apportionment
The FTA provides two key methods for apportioning input VAT:
- Standard Apportionment Method
- The default method used by businesses unless approved for a special method.
- VAT recovery is based on the proportion of taxable supplies relative to total supplies.
- Special Apportionment Method
- A business can apply for a special method if the standard method is not appropriate.
- Approval from the FTA is required.
- Possible methods include sector-based allocation, transaction count, or floor-space-based calculations for real estate businesses.
How to Apply Input Tax Apportionment?
- Identify Expenses – Classify expenses based on taxable, exempt, or mixed-use categories.
- Calculate Recoverable VAT – Use the standard formula:
Recoverbale VAT = (Taxable Supplies / Total Supplies) x Total Input VAT - Report in VAT Return – Ensure accurate reporting in the VAT return to the FTA.
- Maintain Proper Documentation – Keep invoices, receipts, and calculations for audit purposes.
Common Mistakes to Avoid
- Incorrectly claiming full input VAT on mixed-use expenses.
- Not maintaining proper records to support apportionment calculations.
- Using an unapproved apportionment method without FTA approval.
Highlight
Input tax apportionment is a crucial aspect of UAE VAT compliance, especially for businesses that deal with both taxable and exempt supplies. Ensuring correct VAT recovery helps businesses avoid financial penalties and maintain compliance with the FTA regulations. If uncertain, businesses should seek professional tax advice to ensure they are applying the correct apportionment method.
For further guidance, please email us at info@laafzllc.com or whatsapp/call us in +971 50 506 1908.