Input VAT Recoverability of Capital Asset
The provision of recoverability of input tax is a major element in UAE VAT Law. This provision enables any business to reduce the eligible input VAT or tax paid on purchases or expenses incurred by it from the VAT payable by it.
Now the question here is whether input vat or tax incurred on purchase of Capital Asset can be considered as eligible Input VAT or not?
The answer is “Yes”, the VAT paid on Capital Asset can be recovered in the year of acquisition itself. There is a basic misconception that the input VAT on the same can only be recovered proportionately over a period of time. However this assumption is wrong.
Capital Asset Scheme
UAE VAT Law has designed a special scheme for recoverability of VAT paid on purchase of high value capital asset with long term use. This scheme is known as Capital Asset Scheme.
Capital Asset can be considered under the scheme only if it meets following criteria
- The asset should be designated for long term use
- The value of such asset shall be 5 million or more excluding VAT
- The life of such asset shall be 10 years or more in case of building or 5 years or more in case of other capital asset
As explained earlier any VAT paid on Capital Asset can be recovered in the year of acquisition itself.
However the provision with regards to recoverability of input VAT has made it clear that Input VAT cannot be recovered if the business is engaged in making exempted supply or if the the capital asset is used for any non-business purpose.
Now the ambiguity in here arises when a business acquires an asset qualifying as capital asset under the scheme and recovered the VAT paid on it and subsequent if the same is used for any non-business purpose or to make exempted supply, whether the full amount of VAT recovered can be adjusted or not.
This scheme explains that the initially recovered Input VAT on capital assets can be adjusted in future if there is a change from the intended use during a specified life of the asset.
In simple words, business can recover the input VAT it incurred on capital assets in the first year, if it at the time of acquisition its intention was to use the asset for making taxable supplies. However, if the capital asset in the subsequent period is used for the non-business purpose or for making exempt supplies, the taxpayer can reverse the proportionate input VAT to the extent the asset is used for non-taxable usage or exempted supply.
The reversed input VAT should be reported in VAT Return as an adjustment while filing the returns for that year.
The primary matter to consider here is whether the asset qualifies the conditions as explained above to be considered under Capital Assets. Then only it will be allowed to compute input VAT as per this scheme.
For other capital assets, which do not qualify the conditions, input VAT recovery will be determined in accordance with the normal input VAT recovery provisions of law.
The blog post is written by Mr. Nadeem, Tax Advisor at Flyingcolour Accounting & Tax Services. At Flyingcolour, we can guide and help you understand if your assets are eligible under this scheme. If you have any query related to capital assets input VAT then feel free to call +971 4 4542366 today for a quality consultation or please send inquiry to info[at]flyingcolour[dot]com.