Input Tax Apportionment

The Input Tax Apportionment Guide confirms that a business may only recover input tax where this is permissible under the VAT Decree-Law.


Any input tax a business incurs which cannot be directly attributed to either category (taxable or exempt), is categorized as "residual input tax". The amount of VAT recoverable in the residual input tax pot is based on the following calculation as per the VAT Decree-Law (i.e. "Standard Method"):

X % =

("Total amount of input tax" @"recoverable under art 54 of the Law")
/
("Total amount of input tax" @"recoverable and non-" @"recoverable under art 54 of the Law")

If there is a difference of more than AED 250,000 in any tax year between the recoverable input tax as calculated above and the input tax which would have been recoverable if the calculation was made on the basis of the actual use of the goods or services purchased, then the taxable person must make an additional adjustment to input tax recovery in respect of the difference.

Actual Use and Special Methods

The above calculation has to be performed at the end of each VAT period (typically a quarter or a month). At the end of the Tax Year, the business must also perform a wash-up calculation for the whole year using the same principles and make a further adjustment if necessary.

The FTA has specified a number of methods that it permits businesses to use to calculate recovery of residual input tax based on actual use. These are as follows:

  • Outputs based method (available to Islamic and non-Islamic insurance companies, Islamic and non-Islamic retail & wholesale banks and local transport providers);
  • Transaction count method (available to Islamic and non-Islamic banks engaged in wholesale and investment trading activities);
  • Floor space method (broadly available to businesses in the commercial and residential real estate sectors); and
  • Sectoral method (expected to be used by large complex businesses that conduct different business activities through different divisions which are independent of each other from an operational and accounting perspective; for example, a bank may have different divisions dealing with retail customers and investment banking; or an insurance company may, in addition to its core business, have a real estate division which deals with renting out properties).

In circumstances where the actual use of goods and services (calculated based on one of the special methods above) leads to a difference compared to the standard method of more than AED 250,000 of VAT in the last tax year, then the taxable person will be required to make adjustments in the first tax period following the tax year.


Application for a special input tax apportionment method

In addition to the above, the FTA is now also allowing businesses to apply for a special input tax apportionment method ("special method"). It should be noted that any applications approved by the FTA shall only be effective from 1 January 2019 onward and cannot be applied retrospectively.

A new specific FTA form need to be completed to agree a special method. As part of the application for permission, the business is required to identify which special method it is applying for and provide support for the contention that the special method will be more appropriate than the standard method.

FTA approval for the use of a special method will typically be given for 2 years for a sectoral method and 4 years for a non-sectoral method.

Applicants cannot apply to change the approved special method for at least two years, unless specific criteria are met.