5 VAT Input Tax Credit Mistakes UAE Businesses Keep Making

5 Common VAT Input Tax Credit Mistakes UAE Businesses Keep Making

UAE businesses often overlook important details when dealing with Value-Added Tax (VAT), leading to costly mistakes. From incorrect input tax credit (ITC) claims to late voluntary disclosures, here are five common errors and how to correct them before the next VAT return.

Executive Summary

Section 1: Incorrect Input Tax Credit Calculations

#### Key Points:

• ITC Calculation Mistake: Businesses often misapply the different rates and exemptions, leading to overestimation of ITC claims.
• Example: A business claims input tax on entertainment expenses such as client hospitality, which is generally blocked from input tax recovery. The standard rate is 5%, and zero-rating is a separate concept that applies only to specific categories of supply. Input tax on blocked categories cannot be claimed regardless of documentation.

Section 2: Reverse Charge on Imported Services and Goods

#### Key Points:

• RCM Mistake: Businesses often overlook the fact that under the reverse charge mechanism, the recipient self-accounts for VAT on imported services (and certain goods) and can generally recover that input tax in the same return, provided it relates to taxable business activity. VAT on personal or other blocked purchases is not recoverable however it is accounted for.
• Example: A business incorrectly calculates their ITC on imported food items, leading to a significant underestimation of actual input tax credits.

Section 3: Late Voluntary Disclosures

#### Key Points:

• Penalty Risk: Errors in a filed VAT return must be corrected through a voluntary disclosure with the FTA, and administrative penalties can apply both to the error and to late filing. Confirm current FTA penalty rules before relying on any figure.
• Example: A business that missed the VAT return deadline by just a few days is subject to penalties for non-compliance.

Section 4: Missing Tax Invoices for ITC Claims

#### Key Points:

• Invoicing Issue: Businesses often overlook the requirement to keep proper invoices, leading to delayed or denied ITC claims.
• Example: A business fails to maintain adequate records of the items purchased and thus cannot support their input tax credit claims.

Section 5: Incorrect Calculations for Partial Exemptions

#### Key Points:

• Partial Exemption Mistake: Partial exemption (where a business makes both taxable and exempt supplies) requires input tax to be apportioned under the standard method or a special method approved by the FTA. Businesses must classify their supplies correctly and apply the appropriate calculation to avoid overstating or understating recoverable input tax.
• Example: A mixed business (partially exempt, partially taxable) incorrectly calculates its ITC on the wrong rate, resulting in understatement.

Key Takeaways

• Keep Records Clean: Maintain accurate and detailed records of all VAT-related purchases and invoices.
• Consult Experts: Don’t hesitate to seek advice from PNPC Global’s team on complex issues.
• Use Technology: Leverage HyperBridge's Kynetra AI for automated invoicing tracking and precise calculations.

Need help? Connect with PNPC Global’s India/UAE team at connect@pnpcglobal.com