New Value Added Tax (VAT) the Federal Tax Authority (FTA) has published in Public Clarifications on the taxability of recharges commonly known as the recovery of cost. VAT recovery occurs when a taxpayer offsets the VAT paid to its vendors from the total VAT collected from its customers. One of the reasons behind this is the fact that the term recharge is not defined in VAT law, but this gained significant importance from the point of view of VAT consultants in Dubai.
In a VAT recharge situation, there would be three entities involved such as:
- A which charges B
- Entity B which is charged by entity A and, in turn, recharges the cost or part thereof to C
- C which incurs the VAT recharge made by entity “B”.
Challenges in determining VAT liability for recharge
- It needs to be determined that the cost recharged were incurred for the benefit of the customer or it was consumed by the supplier and later recharged to the customer.
- It also has to be determined whether the recharge in itself is an independent supply or ancillary to the mains supply. Also, it is important to ascertain whether the person is recovering the payment made on behalf of another or recovering the expenses incurred as a principal.
Disbursement and reimbursement of expenses for UAE VAT
Recharges are also outside the scope of VAT, which means no direct benefit is derived by the supplier. This item is referred to as ‘Disbursements. i.e. when B purchases certain goods or services, not its own name, but in the name and for the account of its customer (C). B to recover the cost by claiming reimbursement from “C”.
The UAE VAT legislation is silent about the VAT treatment of disbursement and reimbursements, however recently a public clarification is issued by the federal tax authority which clarifies the tax treatment along with conditions to regard a transaction as disbursements.
Some of the VAT legalization from Europe or Saudi Arabia suggest that the disbursements are not subject to VAT typically where the supplier has incurred costs on behalf of the customer and its agents.
In UAE, taxpayers should ensure that all the legal contracts and related documentation are adequately kept to support the VAT treatment.
Also read: VAT Refund Claims
Standalone recharges and ancillary recharges for VAT in UAE
In a situation where the recharge constitutes the supply by entity B to entity C, this recharge from B to C is regarded as an independent supply which is subject to VAT. When it supplied in conjunction with the principal supply, it is subject to the VAT treatment of the principal supply.
In case of an entity booking an air ticket on behalf of another group entity and recharges cost, charge VAT at 5 per cent (as an independent supply of facilitating the bookings) or 0 per cent ancillary to underlying zero-rated principle supply of air travel.
Companies that sell land to developers sometimes recover land-related charges. These charges are typically fees incurred to allow the developer permission to build extra floor space than the permitted limit. These charges are paid by the landowner to the Dubai Land Department and later recharged to the developer or charged as separate.
Recovery of cost should be recorded appropriately in the books.
The relationship between the supplier and the recipient also affects how VAT is to be applied on recharges. Any recharge by a head office to its branch is out of the scope of vat recovery as head office and branch represent a single person. So, any transaction between these two is regarded as an internal transition.
A transaction is qualified as a disbursement only if that cost of the invoice is in the name of the customer on whose behalf payment is made by the taxable person to the supplier.
You may be interested in: VAT Penalties Explained
VAT law is undergoing various transitions.
VAT treatment of recharges will continue to be a debate to taxpayers. The VAT treatment of any particular recharge situation must be determined on a case by case basis, based on the specific facts of the transaction and in light of the VAT principles. If you want to know more about VAT recovery seek guidance from VAT experts who are committed to providing the best VAT advisory service in the UAE. They help clients in full compliance with the rules and regulations of VAT in the UAE. They usually have international experience with VAT and are professionally equipped with relevant industry experience from different ends of the globe.