VAT was introduced in the UAE in 2018, and since that time it become an integral part of the UAE tax system. It is also very important for everyone to understand how it works because it affects both businesses and individuals. Basically, the VAT is charged at the rate of 5% on various goods and services, but the good news is that you can reclaim the VAT that you pay. For this, you just require UAE tax compliance. During VAT reclaim in the UAE, you need to first figure out the input tax recovery. And for this, you need to understand the UAE VAT system.
What is VAT reclaim in the UAE?
VAT reclaim means recovering the VAT that you, as an individual or a business, paid on certain goods and services for business activities. When your business buys any goods or services, a certain amount of VAT is charged. In order to know how to get the reclaimable VAT, you should understand the VAT refund mechanism. To reclaim the VAT, businesses need to comply with FTA regulations. There are two conditions:
- In case the output VAT is greater than the input VAT, then you need to pay the balance amount to the FTA.
- And if the input VAT is greater than the output VAT, you are allowed to claim the refund.
Why is VAT reclaim important for businesses?
Businesses in the UAE can reclaim the input tax they have paid on business-related expenses from the FTA. These expenses must be incurred on taxable supplies. VAT reclaim is important for businesses due to several reasons, such as:
- Improve business cash flow in the UAE.
- Lower operational cost.
- Avoid excess tax burden.
- Ensure VAT compliance with the FTA.
- Reduce business costs in the UAE.
All these reasons ensure the importance of VAT reclaim for businesses.
Different types of VAT reclaim available in the UAE
There are different types of VAT reclaim, depending on who is claiming, where the VAT was paid, and the purpose of the expense. Different VAT reclaim categories UAE:
- Partially recoverable input tax.
- Fully recoverable input tax.
- Non-recoverable input tax.
It is also important to understand that what is eligible for VAT reclaim refers to input tax that can legally be recovered from the Federal Tax Authority when:
- VAT was correctly charged on taxable supplies.
- These expenses must be related to taxable business activities.
- The expense is not specifically blocked or restricted.
This reclaim is usually done through the VAT return or refund application.
Standard VAT reclaim for UAE businesses
It is a VAT reclaim, or businesses are allowed to refund input tax paid on eligible business expenses (those that are paid on taxable supplies) by offsetting it against output tax through the regular VAT return. How it is calculated:
- Output VAT – Input VAT:
Excess is carried forward, and a refund request from FTA.
Special VAT reclaim schemes
Under VAT recovery pathways, the UAE has special reclaim schemes that are as follows:
- Tourist VAT refundable scheme.
This scheme is operated via approved refund operators, according to which tourists can reclaim VAT on eligible purchases.
- Foreign business refund scheme.
The non-UAE businesses that meet the FTA guidelines but do not have a fixed establishment can also reclaim VAT.
- Diplomatic refunds.
These are reclaim tax, subject to special approvals and documents.
Step-by-Step VAT Reclaim Process in the UAE
Here is a step-by-step reclaim process for those who need to recover VAT paid on taxable expenses in line with FTA rules, from verifying eligibility and documentation to submitting the VAT return or refund application.
Step 1 – Prepare correct VAT records
The first and most important step I VAT reclaim process is maintain accurate VAT records. From valid tax invoices, payment proofs, accounting records, and import documents, every document must be clear to show input VAT for eligible business activities.
Step 2 – Verify VAT reclaim eligibility
In this step, the businesses need to review all the expenses to ensure that the VAT paid is eligible for recovery. It also needs to ensure that this eligibility is as per the UAE VAT laws and FTA guidelines. So, you need to check that the expenses are:
- Business related.
- Link to taxable and zero rated supplies.
- Not classified as non-recoverable VAT or exempt supplies UAE.
- Supported by valid tax invoices.
Step 3 – Submit VAT reclaim request via FTA Portal
Now you need to submit the eligible VAT amount through the FTA portal by a separate refund application or a periodic VAT return. For online refund submission, businesses need to accurately complete the refund filing steps after tax portal login and attach supporting documents if requested. All this must be submitted within the FTA deadlines.
Step 4 – Await FTA review and assessment
After submitting the VAT reclaim, it is time for the FTA review process. Refund assessment in the UAE is important to ensure compliance with the UAE VAT law and guidelines. In this stage, FTA verifies:
- Supporting documents.
- Check the eligibility of the input tax.
- Request additional information if needed.
The business that claims the input tax must respond promptly to any FTA queries. The reason this claim will only be approved and refunded once the assessment is complete
Step 5 – Receive VAT refund or adjustment
Finally, after the FTA review, businesses will receive the refund or adjustment after bank details confirmation, or see it adjusted against future VAT liabilities in the VAT return. In case any discrepancies or partial rejections occur, the FTA will communicate the adjustments.
Important requirements for successful VAT reclaim in the UAE
It is important for businesses to know the requirements for smooth and successful VAT reclaim, such as:
- Businesses need to properly register for VAT.
- Accurate VAT reclaim documents.
- Businesses' expenses proof.
- Maintain financial documentation.
- Supporting evidence, UAE.
- Tax invoices and eligibility documents.
- Complete the FTA compliance checklist.
Free zone authorities eligible for VAT reclaim assistance
There are different free zone authorities that are eligible for VAT reclaim assistance, such as:
- JAFZA VAT refund.
- DAFZA VAT reclaim.
- DMCC VAT reclaim.
- ADGM VAT refund.
These are UAE-designated zones that offer free zone business support and VAT reclaim assistance.
Different penalties for incorrect or fraudulent VAT reclaim
It is important to know that FTA takes the incorrect and fraudulent VAT reclaim very seriously. And the businesses that fail to comply with rules result in legal actions, fines, and FTA penalties in the UAE, such as:
- Incorrect refund claim fine.
- Claiming VAT on non-business expenses.
- non-compliance penalties
Fraudulent VAT reclaim consequences are as follows:
- Criminal prosecutions and imprisonment.
- Damage of business reputation.
- Financial fines and
- AED penalty amounts for claim filed after the deadline is 1000 AED for first time and for repeated offense it is 2000 AED.
- 2% of unpaid Vat is charged on late payment of a penalty right after the due date.
Why do businesses require hiring a professional VAT Consultant for VAT Reclaim in the UAE?
By hiring a professional VAT consultant in the UAE for VAT reclaim, businesses can help themselves in many ways, like:
- Help to avoid FTA penalties and fines.
- Ensure the accurate VAT reclaim.
- Easily navigate the complex transaction.
- Help to optimize the cash flow.
- Offer refund assistance services.
- Provide VAT reclaim guidance.
So, hire the right consultant and stay compliant with rules and regulations.
FAQs
Q1. How long does the VAT reclaim process take in the UAE?
- Standard refunds are usually processed in 20-30 business days after submission of the correct Vat return, if businesses are registered.
Q2. Who is eligible to reclaim VAT?
- All the businesses that are VAT-registered in the UAE and that also pay for taxable supplies can reclaim VAT.
Q3. What documents are required for VAT refund applications?
- Few documents that are required for VAT reclaim are valid tax invoices, proof of payment, VAT registration certificate, completed VAT refund claim form, and supporting documents if required.
Q4. Can a business reclaim VAT on imported goods?
- If the imported goods are used for business purposes, then VAT-registered businesses can reclaim the VAT.
Q5. How to check VAT reclaim status on the FTA portal?
First of all, log in to the FTA account, then go to VAT & refund and select VAT refund request, and view the status.