VAT Clarification: What You Should Know

Our latest VAT briefing covers the published Federal Tax Authority (FTA) Public Clarification on Tax Invoice requirements, Medical Insurance and Non-Recoverable Input Tax – entertainment services.

At Gulf Tax Accounting Group, we recognise that some of these transactions may be complex to analyse and therefore we have highlighted below a few of the more pertinent issues addressed in the FTA Public Clarification.

This briefing is relevant to all businesses making a taxable supply and provides further clarity over the issuance of tax invoices. Similarly, we acknowledge the Medical Insurance clarification will have a major impact on all of our clients, depending on the Emirate where individual employee visas are held as various Emirates have different requirements regarding the provision of medical insurance.

For assistance or more information on these three areas of focus, please contact Peter Whatley at peter.whatley@gtag.ae or David Daly at david.daly@gtag.ae

In this briefing:

• VAT Guide (VATGIN1) on Insurance (Medical)
• VAT Public Clarification (VATP005) on Non-recoverable input tax – entertainment services
• VAT Public Clarification VATP006 on tax invoices

VAT Guide (VATGIN1) on Insurance (Medical)

In the Insurance Guide, the FTA covers the following discussions on Medical Insurance:

• Employers are normally not entitled to recover input tax incurred in purchasing health insurance for family members of employees, unless the employer has a legal obligation to do so under the applicable labour law in the UAE or Designated Zone.
• Alternatively, the employer would need to be able to show that it is both a contractual obligation in its employment contract and it is required in order that the employee may perform the role for which they are employed.

The Medical Insurance will have a major impact on all of our clients, depending on the emirate where individual employee visas are held as various Emirates have different requirements regarding the provision of medical insurance, for instance Abu Dhabi requires all employers to provide medical insurance to the employee, spouse and up to 3 dependents, while Dubai requires the provision of insurance only to the employee.

As companies are only allowed to claim the VAT on medical insurance if it is required in terms of law and is a necessity for the employee to do their duty, the result is the following VAT treatment in the various Emirates:

1. Dubai – Can only claim the VAT relating to the employee (Spouse and dependents cannot be claimed)
2. Abu Dhabi – Can claim VAT on the employee, spouse plus up to 3 dependents (cannot claim for dependents in excess of 3)
3. Other Emirates – There is no legal requirement in the other Emirates for employers to provide medical insurance. If this is the case, then the logical extension of this is that they will not be allowed to claim the VAT on any medical insurance
4. Free Zones – The VAT treatment will be dependent on whether the individual free zone requires the employer to provide medical insurance.

VAT Public Clarification (VATP005) on Non-recoverable input tax – entertainment services

This clarification is important for understanding how the FTA will determine when entertainment services are provided.

Entertainment services

Under the UAE Value Added Tax (VAT) Regulations:

• A non-Designated Government Entity may not recover input tax incurred in relation to the provision of entertainment services to anyone not employed by that person.
• A Taxable Person (including a Designated Government Entity) may not recover input tax incurred in relation to the provision of entertainment services without charge to its employees.

The UAE VAT Regulations define entertainment services to be “hospitality of any kind, including the provision of accommodation, food and drinks that are not provided in a normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.”

In broad terms, the FTA has clarified that:

• Food and drinks that are incidental to the business purpose of a meeting (simple hospitality) are not entertainment services. For example, lunch served in the same venue as the meeting at a cost consistent with employee meal allowances is unlikely to represent entertainment services. However, hospitality that becomes an end in itself should be considered as entertainment services. For example, a gala dinner with a short introduction by a speaker is likely to represent entertainment services.
• Food and beverages provided to conference attendees should be treated as entertainment services if there is no conference fee.
• Tea and coffee, dates, chocolates and equivalent snacks that are provided in the office or during meetings without charge should not be treated as entertainment services.
• Paying or reimbursing hotel accommodation for staff during a business trip is not entertainment services, so such activity should not result in unrecoverable input tax.

Implications for UAE businesses

Businesses need to review the clarification to ensure they are correctly determining when entertainment services are provided. Failing to do so may result in incorrect reporting of recoverable input tax.

VAT Public Clarification VATP006 on Tax Invoices

VAT Public Clarification VATP006 addresses the requirements for when a tax invoice must be issued and the particulars that must be included.

This publication is important as the tax invoice process is relevant to all businesses making taxable supplies, and tax invoices received must be compliant with the UAE’s VAT legislation to enable input tax recovery on the VAT return. In this regard, it is important to note the emphasis on the word ‘must’ – these requirements are mandatory rather than optional.

Failure to comply with the stated requirements can have a number of implications for the business, ranging from commercial (upset customers that may not be entitled to a Tax Credit for VAT incurred) to the imposition of penalties for the failure to issue and deliver compliant tax invoices. There could be many other flow on consequences, hence the importance of ‘getting it right’.

The Public Clarification includes the following key points:

• Whenever a taxable supply is made, a tax invoice must be issued and delivered to the recipient (if the conditions for a simplified tax invoice are met, then a simplified tax invoice can be issued and delivered instead).
• It is not acceptable to offer only an option of providing an invoice (and thus not provide one if the customer does not request one). A tax invoice must be provided in all circumstances where a taxable supply is made.
• A simplified tax invoice does not have to show the net value (the value before tax) for each line item.
• A full tax invoice must show the tax value and net value for each line item; however the gross value (the total including tax) does not have to be shown for each line item.
• If a tax invoice is issued in a foreign currency, it must show the tax amount converted to AED and the approved exchange rate used for the conversion.

Rounding on tax invoices must be to the nearest Fils on a line item basis.