Businesses engaged in making a mixture of taxable and exempt supplies must apportion the input tax which they incur for making such mixed supplies. Apportionment calculations must be undertaken by the taxable person on a period-by-period basis with an annual “wash-up” calculation to be performed in the period following the end of the tax year.
Taxable persons filing monthly returns with a 31 December 2020 tax year end must undertake the annual wash up calculation and make any required adjustments to input VAT recovered in the January 2021 VAT return to avoid potential penalties for late or underpaid VAT. Businesses operating in the following sectors are most likely to be required to undertake apportionment calculations:
- Real estate – residential supplies
- Banks/financial institutions
- Local transport service providers
- Insurance companies
Please note that the requirement to undertake apportionment calculation is not limited to the above sectors and can apply to any entity that makes both exempt and taxable supplies.
Apportionment – Key points
The UAE Federal Tax Authority (FTA) issued an updated Input Tax Apportionment Guide (Guide) in December 2019, covering special apportionments methods and annual adjustments. Based on this Guide and the legislation, the FTA requires the following:
· Comparative calculation for a full 12-month period (wash-up calculation):
- with the monthly/quarterly apportionment done using the standard method; and
- with the actual use calculation using one of the approved special methods listed in the Guide.
· Special apportionment methods include: output-based method, transaction count method, floor space method and sectoral method. The FTA stipulates that only certain methods will be available to businesses from certain industries (i.e. not all methods will be available to all industries/businesses)
· A taxpayer must apply to the FTA to use a special method of apportionment and there is a formal process to obtain permission (i.e. you cannot simply elect to start using a particular method at your own discretion). Typically, once approved the taxpayer will be required to use this method for at least two years.
· It is not compulsory for a VAT registered business to apply for a special apportionment method, however, the FTA expects where there is a difference of more than AED 250,000 in any tax year between the recoverable input tax as calculated in accordance with the standard apportionment method (outlined in the legislation) and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of goods or services (i.e. applying a special method), the taxpayer should apply to the FTA for permission to use a special method.
· Where the FTA has granted permission to use a special input tax apportionment method, the applicant cannot apply to change the approved method for at least two years following the approval. However, the taxpayer will be required to notify the FTA where the result produced over the full year by the input tax apportionment method approved by the FTA differs more than 10% from the result the method generated at the time of application, in order for the FTA to consider whether the approved method is still suitable for the business.
It is important that taxpayers act early to ensure that they have the appropriate apportionment calculations undertaken in a timely manner and to optimize their entitlement to claim input VAT, while at the same time ensuring they remain compliant with the requirements of UAE VAT law.
For questions, discussion or assistance with undertaking these calculations or applying for a special method of apportionment, please contact your KPMG Lower Gulf Tax advisors.