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30 January 2019
Non-cash employee benefits can create a value added tax (VAT) headache for businesses. Irrecoverable VAT can create a real cost for businesses that are engaged in exempt activities. However, even fully taxable businesses in the United Arab Emirates may find that VAT recovery is blocked for certain activities. Even if input VAT is recoverable on the cost of the benefit, providing it to employees may trigger an obligation to account for VAT on the deemed supply of the benefit to the employee. For many benefits, the VAT treatment will vary depending on the circumstances.
The VAT incurred on costs which are directly or indirectly associated with an exempt supply of goods or services is not fully recoverable from the tax authority. This is a particular problem for businesses in the financial services sector.
Businesses that are engaged in fully taxable activities (ie, making supplies liable at 5% or 0% VAT) are generally entitled to recover the VAT paid on associated costs from the tax authority on their periodic VAT returns. For them, costs will generally be VAT neutral, with the end consumer bearing the burden of the VAT.
However, even fully taxable businesses find that some VAT is specifically non-deductible. For example, VAT incurred on certain costs which are not viewed as being incurred wholly for the purpose of the business or which are specifically blocked under the VAT law, are unrecoverable from the tax authority.
In addition, all businesses may incur further administration and financing costs due to the management of VAT in their business.
Cash benefits to employees are outside the scope of VAT, but non-cash benefits can result in non-deductible VAT.
Even if VAT is recoverable on expenses in connection with non-cash benefits for employees, these benefits may still trigger an obligation for a business to account for the VAT on the deemed supply of goods or services to its employee – as if the good or service had been sold commercially, again resulting in a real VAT cost for the business.
Many employee benefits will have a range of VAT treatments depending on the circumstances of each benefit. Typical employee benefits include:
Each benefit should be analysed on a case-by-case basis to identify the correct VAT treatment and associated obligations for the employer.
The following scenarios can create particular difficulties:
For further information on this topic please contact Joanne Clarke at Pinsent Masons LLP by telephone (+971 4 373 9700) or email (firstname.lastname@example.org). The Pinsent Masons website can be accessed at www.pinsentmasons.com.
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