Can We Claim VAT Paid on Expenses Prior to VAT Registration?

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Before answering let’s see what the registration limit for VAT is. There are two types of Registrations under VAT Law:

1. Mandatory Registration: For those businesses whose value of supplies exceeds AED 375,000 in the previous 12 months or anticipated to exceed in next 30 days during the current financial year
2. Voluntary Registration: For those businesses with value of Supplies / Taxable Expenses exceeding AED 187,500 in previous 12 Months or anticipated to exceed in next 30 days during the current financial year

All the Businesses whose turnover does not exceed either the Mandatory threshold limit or the Voluntary threshold limit are not required to apply for registration. Whenever a Business entity crosses the either of the above specified limits can apply for registration and get registered. As a consequence, they will be getting registered after the implementation date (i.e. 1st January 2018).

If you observe closely there are two period for the registrants who are registering after the implementation date, namely Pre-Registration period and Post-Registration period. A Registrant can claim input on all the expenses it paid in the Post-Registration period. Now the question is whether the registrant can claim VAT paid on expenses in Pre-Registration period.

The answer to the question is Yes, the UAE VAT law allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration. This will be allowed, only if the goods and services were used to make supplies that give the right to input tax recovery upon tax registration. This implies that the purchases / expenses on which VAT was paid before registration were used in making taxable supplies after registration.

As per Article (56), A Registrant may recover Tax incurred before Tax Registration on the Tax Return submitted for the first Tax Period following Tax Registration, which has been paid for any of the following:

1. Supply of Goods and Services made to him prior to the date of Tax Registration
2. Import of Goods by him prior to the date of Tax Registration

Provided that these Goods and Services were used to make supplies that give the right to Input Tax recovery upon Tax Registration.

As an exception to the provisions of Clause (1) of this Article, Input Tax may not be recovered in any of the following instances:

1. The receipt of Goods and Services for purposes other than making Taxable Supplies
2. Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration
3. If the Services were received more than five years prior to the date of Tax Registration
4. Where a person has moved the Goods to another Implementing State prior to the Tax Registration in the State

Except for the above-mentioned instances, A registrant can claim VAT paid on supplies prior to registration in all other cases only if the same has been used for making Taxable supplies.

This blog post is written by CA Rashid Ali, Tax Advisor at Flyingcolour Accounting & Tax Services. At Flyingcolour, we have a team of qualified professionals who can help you with all kinds of UAE VAT claims, registration and filing. Feel free to call +971 4 4542366 today for a quality business setup consultation or please send an inquiry to info[at]flyingcolour[dot]com.