In the UAE, only if the value of the supply exceeds AED 375,000 in the past 12 months, or is expected to exceed its value within the next 30 days of the current fiscal year, the mandatory VAT registration is required. For companies whose supplies/taxable expenses have a value of more than AED 187,500 in the past 12 months or are expected to exceed 30 days in the current fiscal year, value-added tax can be selected.
All businesses whose supply value is less than the defined threshold limit will not be allowed to register under UAE VAT. However, when the value of supplies exceeds or is expected to exceed the defined VAT registration threshold, this will not prevent or restrict them from obtaining VAT registration in the future. This ultimately led to a business situation in which companies were not registered on January 1, 2018 (the date of implementation of VAT), but within a period of time, they have exceeded the defined threshold and have been in the UAE Register under VAT.
If you look at the above situation carefully, the business journey is divided into two stages: pre-registration and post-registration. In the pre-VAT registration stage, they must pay VAT for their purchases/expenses, but cannot recover the input VAT. This is because only registered companies are allowed to recover input VAT. At the post-registration stage, they must charge 5% VAT on taxable supplies and can also recover the input VAT paid on purchases/expenses.
Although the above discussion is clear, the puzzle is to recover the input VAT paid before registration? Can a company recover the VAT paid before registering for VAT?
Yes, the UAE VAT law allows the recovery of input tax paid on goods, services and imported goods before the date of VAT registration. This is only allowed if goods and services are used to provide supplies that are entitled to input tax recovery at the time of tax registration. This means that purchases/expenses that have been paid for VAT before registration have been used for taxable supplies after registration.
The recovery of input VAT should comply with the general requirements for input tax recovery. More importantly, it should be recovered in the VAT return submitted in the first tax period after tax registration.
However, the UAE VAT also provides for certain special circumstances, that is, the VAT paid before registration cannot be recovered. The following is an example:
1. Goods and services purchased to make duty-free supplies. This means that you can only recover VAT if you use VAT to make taxable supplies (including zero-rated supplies).
2. Input tax related to some capital assets that were depreciated before the tax registration date. This means that if part of the asset is depreciated, the input tax on such assets cannot be recovered within the depreciation range. For example, if you purchase a fixed asset with an expected life of 10 years, and when you register for VAT, the asset has only 3 years of useful life. In this case, you can only recover 30% of the original VAT paid.
3. The service input tax received more than 5 years before the tax registration date will not be refunded. This restriction only applies to services, not to goods.
4. Whether such goods have been transferred to other Gulf Cooperation Council countries before tax registration.
In addition to the above, in all other cases, if it is used to provide taxable supplies, you will be eligible to recover the value added tax paid before registration.
Allowing companies to recover the value-added tax paid before registration can prevent taxation of final consumers. Companies registered after January 1, 2018 should understand the benefits of this provision in the recovery of input value-added tax. Failure to understand this legal requirement will result in the recovery of input value-added tax losses. Similarly, for companies, it is important to note that the VAT paid before registration is only allowed to be recovered when the VAT return is submitted in the first return period after registration. Therefore, companies must carefully analyze the above regulations to ensure that they submit returns in the first tax period. After submitting the return for the first tax period, it is not possible to recover the input tax amount paid before tax registration.