The Core VAT Calculation Formula
UAE VAT is calculated using a straightforward formula that applies across all VAT return periods:
Net VAT Payable = Output Tax − Input Tax
Output tax is the VAT a registered business charges on its taxable supplies of goods and services. Input tax is the VAT a registered business has paid on its purchases and expenses that relate to taxable business activities. The difference between the two is either payable to the FTA (where output tax exceeds input tax) or recoverable from the FTA (where input tax exceeds output tax for a period).
This formula applies to the VAT return as a whole. For each individual transaction, the calculation is simpler: VAT Amount = Supply Value × VAT Rate. The rate and the taxability of the supply determine whether VAT applies at all.
UAE VAT Rates and Supply Categories
The UAE VAT framework under Federal Decree-Law No. 8 of 2017 applies different treatments to different categories of supply. Understanding which treatment applies to each supply is essential before any calculation can be performed.
| Supply Category | VAT Rate | Examples |
|---|---|---|
| Standard-rated | 5% | Most goods and services supplied in the UAE |
| Zero-rated | 0% | Exports, international transport, certain food items, healthcare, educational services meeting specific criteria |
| Exempt | No VAT | Bare land supply, certain financial services, residential property (subsequent supply), local passenger transport |
| Out of scope | Not subject to VAT | Supplies made outside the UAE, employment income, supplies by non-registered persons below threshold |
The distinction between zero-rated and exempt is critical for input tax recovery. On zero-rated supplies, the supplier charges 0% VAT but can still recover input tax on related purchases. On exempt supplies, the supplier charges no VAT and cannot recover input tax on related purchases. This makes exempt supplies more expensive for the supplier than zero-rated ones.
Also Check: VAT Consultancy Services
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
Calculating VAT on Standard-Rated Supplies
For a standard-rated supply, the calculation is:
VAT Amount = Net Value of Supply × 5%
VAT-Inclusive Price = Net Value + VAT Amount = Net Value × 1.05
To extract the VAT from a VAT-inclusive price:
VAT Amount = VAT-Inclusive Price ÷ 1.05 × 0.05 = VAT-Inclusive Price × 5/105
Worked Example: Standard-Rated B2B Supply
A UAE consulting firm invoices a client AED 50,000 for advisory services. The services are standard-rated at 5%. The tax invoice shows:
- Net value: AED 50,000
- VAT at 5%: AED 2,500
- Total payable: AED 52,500
The consulting firm records AED 2,500 as output tax. The client (if VAT-registered and using the services for taxable activities) records AED 2,500 as input tax.
Worked Example: Extracting VAT From an Inclusive Price
A retail customer pays AED 210 for a product at a VAT-inclusive price. To find the VAT component:
- VAT = AED 210 × 5/105 = AED 10
- Net price = AED 210 − AED 10 = AED 200
Check: VAT Registration Services
Calculating Net VAT Payable for a Tax Period
At the end of each VAT return period, the business calculates its net VAT position by aggregating all output tax and all recoverable input tax across the period.
Worked Example: Full Period Calculation
A UAE trading company has the following activity in a quarterly tax period:
- Standard-rated sales: AED 1,200,000 → Output tax = AED 60,000
- Zero-rated exports: AED 300,000 → Output tax = AED 0
- Standard-rated purchases (for taxable activities): AED 800,000 → Input tax = AED 40,000
- Import of goods (customs-cleared VAT paid at border): AED 100,000 → Input tax = AED 5,000
Net VAT payable = AED 60,000 − (AED 40,000 + AED 5,000) = AED 15,000 due to the FTA
This AED 15,000 must be paid through EmaraTax within 28 days of the end of the quarterly tax period.
Reverse Charge: Calculating VAT on Imported Services
Where a UAE VAT-registered business receives services from a supplier outside the UAE, and the place of supply is the UAE, the reverse charge mechanism applies. The UAE business must calculate and account for VAT on the imported service as if it were both the supplier and the recipient.
Reverse Charge VAT = Value of Imported Service × 5%
The business reports this amount as output tax on the VAT return (in the imported services box) and, where the service is used for taxable business activities, simultaneously recovers the same amount as input tax. Where the service is used entirely for taxable purposes, the reverse charge has no net VAT cost. Where it is used for exempt activities, the input tax is not recoverable and the 5% becomes a real cost.
Worked Example
A UAE company pays AED 20,000 to an overseas software provider for a SaaS licence used entirely for standard-rated business activities.
- Reverse charge output tax: AED 20,000 × 5% = AED 1,000
- Recoverable input tax: AED 1,000
- Net VAT cost: AED 0
Check: VAT Deregistration Services
Partial Input Tax Recovery: Mixed-Use Businesses
Where a UAE business makes both taxable supplies (standard-rated and zero-rated) and exempt supplies, it cannot recover input tax in full on expenses that relate to both. Input tax must be apportioned between the taxable and exempt activities. Only the portion attributable to taxable activities is recoverable.
The standard apportionment method is:
Recoverable Input Tax = Total Input Tax × (Value of Taxable Supplies ÷ Total Value of All Supplies)
Worked Example
A UAE financial services business has taxable supplies of AED 600,000 and exempt supplies of AED 400,000 in a period, with total input tax of AED 30,000 on overheads relating to both activities.
- Taxable proportion: AED 600,000 ÷ AED 1,000,000 = 60%
- Recoverable input tax: AED 30,000 × 60% = AED 18,000
- Non-recoverable (attributable to exempt supplies): AED 12,000
Input Tax That Cannot Be Recovered
Certain categories of input tax are blocked from recovery under UAE VAT law regardless of whether the purchase relates to taxable activities:
- Motor vehicles used for personal purposes: input tax on cars used for personal transportation of directors, employees, or others is not recoverable
- Entertainment expenses: input tax on entertainment provided to non-employees (clients, prospects) is not recoverable
- Purchases not supported by valid tax invoices: input tax cannot be claimed without a valid tax invoice containing all mandatory fields, including the supplier’s TRN
- Purchases for exempt activities: as above, input tax attributable to exempt supplies is not recoverable
Common VAT Calculation Errors to Avoid
- Applying 5% to a VAT-inclusive price: applying the 5% rate to the gross price instead of the net price overstates VAT. Use the 5/105 formula to extract VAT from a VAT-inclusive amount
- Recovering input tax on blocked categories: claiming input tax on motor vehicles or entertainment without checking the blocking rules creates an overstated input tax position that may be assessed by the FTA
- Treating exempt supplies as zero-rated: failing to distinguish between exempt and zero-rated results in incorrectly claiming input tax on expenses related to exempt supplies
- Not applying reverse charge on imported services: failing to self-account for VAT on services received from overseas suppliers understates output tax and may result in an FTA assessment
- Using inclusive prices as the VAT base: the 5% rate is applied to the net (exclusive) value of the supply, not the gross amount
Frequently Asked Questions (FAQs)
What is the formula for calculating UAE VAT?
How do you extract the VAT amount from a VAT-inclusive price?
What is the difference between zero-rated and exempt supplies for VAT calculation?
How does the reverse charge work for imported services in UAE VAT?
When is input tax not fully recoverable in the UAE?
Need Expert Advice?
Contact the team at Farahat & Co. for professional support and expert insights for businesses operating in the UAE.
How Farahat & Co. Can Help
Farahat & Co. assists UAE businesses with VAT calculation, VAT return preparation and filing, input tax recovery reviews, reverse charge assessments, and partial exemption apportionment. As an FTA-registered Tax Agent, our team ensures that VAT is calculated correctly across all supply types and that input tax positions are maximised within the rules.
Contact Farahat & Co. today to discuss your VAT calculation and compliance requirements.
