As a general rule, the Input Tax recoverable is the total of Input Tax paid for Goods and Services which are used or intended to be used for making any of the following:
• Taxable Supplies
• Supplies that are made outside UAE which would have been Taxable Supplies had they been made in UAE.
However, there are certain exceptions for claiming Input Tax in respect of the following Taxable Supplies (Non-recoverable Input Tax):
1. Provision of entertainment services to anyone not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors.
2. Where a motor vehicle was purchased, rented, or leased for use in the Business and is available for personal use by any Person.
3. Where Goods or Services were purchased to be used by employees for no charge to them and for their personal benefit including the provision of entertainment services, except in the following cases:
• where it is a legal obligation to provide those Services or Goods to those employees under any applicable labour law in the State or Designated Zone;
• it is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people;
• where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.
a. The phrase “entertainment services” shall mean hospitality of any kind, including the provision of accommodation, food and drinks which 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.
b. The phrase “motor vehicle” shall mean a road vehicle which is designed or adapted for the conveyance of no more than 10 people including the driver. A motor vehicle shall exclude a truck, forklift, hoist, or other similar vehicle.
I. HEALTH INSURANCE
The provision of health insurance will be liable to VAT at the standard rate. Where this is provided by an employer to an employee as a benefit which is part of a contract of employment, the employer will be able to recover the input tax on such products, subject to the usual rules of VAT recovery. Where an employer provides health insurance to the family of the employee, input tax will only be recoverable if there is a legal obligation to provide the insurance to the family members.
The reason for this is that Article 53 of the Executive Regulations dealing with blocked input tax envisages that costs incurred for the personal benefit of employees (which health insurance would be), will only be recoverable where:
I. It is a legal obligation to provide those services or goods to those employees under any applicable labour law in the State or Designated Zone.
II. It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people.
The important part of the above is under II, where family health insurance is a contractual obligation, then it must also be required in order that the employee may perform their role. It is not the case that an employee requires their family member to have health insurance in order that the employee may perform their role, and on that basis the input tax on health insurance provided to families under II above should not be recoverable.
In contrast, where the law stipulates that the employee’s family members must be provided with health insurance, this would be dealt with under I above and the input tax incurred by the business would be recoverable (for example, Abudhabi government has made it a legal obligation for all the Companies to provide health insurance to dependents as well).
II. MOBILE PHONE BILLS PAID FOR EMPLOYEES
Mobile phone Bills paid which is being used by employees for no charge to them shall be analysed based on the following factors:
a. Is it necessary to provide such free services in order to perform their role?
b. Is this the legal obligation to provide such services?
If the answers to any of the above questions is yes, then the Taxable Person is allowed to claim the Input Tax. Please note that the onus is on the taxable person to substantiate that such services provided to employees is necessary for the performance of their roles & responsibilities.