Non-Recoverable Tax on Entertainment Services
As per the UAE VAT law tax paid on most of the business, expenses can be recovered. At the same time tax paid on certain expenses cannot be recovered, those are called a non-recoverable tax. As per the Article (53) of Executive Regulation of the UAE VAT law, VAT paid on certain expenses are non-recoverable tax in nature. It includes entertainment expenses and expenses related to the motor vehicle. This blog will be addressing the non-recoverable tax on entertainment services with reference to Public Clarification issued by the Federal Tax Authority in the month of July 2018.
What are entertainment services as per the UAE VAT law?
As per the Article (53) (2) (a) of Executive Regulation, entertainment service means hospitality of any kind which includes:
- the facility of accommodation.
- Entry to any shows or events.
- Any pleasure or entertainment trips.
- Food and drinks which are not normally given in the normal course of meetings.
Whether the input credit on entertainment services given by the taxable person can be recovered?
In the case of entertainment services given to the following are not recoverable:
- Customers
- Potential Customers
- Owners
- Investors
- Shareholders
- Officials
What are the instances where input credit on the entertainment services given to employees can be recovered?
- If there is a legal obligation as per the UAE labour law or any of the Designated Zones.
- If it is a contractual obligation or a documented policy of the taxable person
- In order for employees to perform their role better and is
- Normal business practice while employing such employees
- For example:
- Hotel Accommodation for one week to a new employee.
- An employee on Domestic Business Trip stays in a hotel.
- An employee on Business Trip & spent on food & drinks.
- If such entertainment services are deemed supply as per the UAE VAT law.
Simple hospitality provided during the meetings are considered as Entertainment services are given in the normal course of meetings and the input credit can be taken.
Following are the examples:
- Simple Food & Refreshments in office.
- Normal lunch during business meetings.
Following are the examples of entertainment services where input credit cannot be recovered:
- Iftar Party
- Staff Birthday Party
- Farewell Party
- Motivational Speech & Food
- Music Event & Food
- Gala Dinner
Catering expenses related to conference and business events.
Input credit on Catering expenses related to conference and business events can be recovered if fees is charged from the attendees with VAT. Where there are no fees charged from the attendees generally input credit on catering services cannot be claimed.
Input credit on the following miscellaneous office expenses can be recovered:
- Flowers in Reception, decoration on special events.
- Chocolates, Snacks are given in-office meetings.
- Tea & coffee is available in the office.
How is the treatment of Input Credit on the gift items forming the nature of entertainment services?
If the value of the gift is more than AED 500/- per employee for a period of 12 months, it will become a deemed supply and hence will be taxable. If the value is less than AED 500/- per employee for a period of 12 months, it will not be a deemed supply. However, if such gifts are in the nature of entertainment (examples given below) input credit on such expenses cannot be recovered.
- EID Gifts
- Gift for other festivals or occasions
- Employee of the Month
- Gift to Retiring Employee
- Wedding Gifts
- Birthday Gifts
Note: this blog is prepared based on Public Clarification given by FTA VAT P 005 and the provisions of the Article 53 of the Executive Regulation of the UAE VAT law. Below is the extract of the Article (53) Executive Regulation.
1) . Input Tax shall be non-recoverable if it is incurred by a Person in respect of the following Taxable Supplies:
- Where the Person is not a Government Entity as specified in a Cabinet Decision in accordance with Article (10) and (57) of the Decree-Law, and there is provision of entertainment services to anyone not employed by the Person, including customers, potential customers, officials, or shareholder or other owners or investors.
- Where a motor vehicle was purchased, rented or leased for use in the Business and is available for personal use by any Person.
- Where Goods or Services were purchased to be used by employees for no charge to them and for their personal benefit including the provision of entertainment services, except in the following cases:
- where it is a legal obligation to provide those Services or Goods to those employees under any applicable labour law in the State or Designated Zone.
- it is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people;
- where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.
2). For the purposes of this Article:
- The phrase “entertainment services” shall mean hospitality of any kind, including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.
- The phrase “motor vehicle” shall mean a road vehicle which is designed or adapted for the conveyance of no more than 10 people including the driver. A motor vehicle shall exclude a truck, forklift, hoist or another similar vehicle.
3). Provision of catering and accommodation services shall not be treated as entertainment services where it is provided by a transportation service operator, such as an airline, to passengers who have been delayed.
4). A motor vehicle shall not be treated as being available for private use if it is within any of the following categories:
- a taxi licensed by the competent authority within the State;
- a motor vehicle registered as, and used for purposes of an emergency vehicle, including by police, fire, ambulance, or similar emergency service;
- a vehicle which is used in a vehicle rental business where it is rented to a customer.
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