Vat recovery for purchasing goods

VAT Recovery for Purchasing Goods or Services to be Used by Employees

Companies may purchase goods or services to be used by employees to perform their role, as part of a remuneration package, or as entertainment.

In case an employee uses goods or services purchased by the company for its personal benefit, the VAT incurred on related costs may not be recoverable by the company (albeit only in exceptional cases). The Federal Tax Authority (“FTA”) has released two Public Clarifications (VATP005 and VATP0028) on recovery of VAT for businesses on costs when the sole business use can be questioned.

In our experience, the FTA is strict with approving the VAT recovery on purchase of goods and services to be used by employees. In many cases, the FTA requests for documented evidence of the sole business use of the company assets.

When a company purchases of goods or services to be used by its employees, different consequences for VAT recovery may apply:

• The goods or services provided purchased by the company are strictly used by its employee for business purposes.
• The VAT on costs associated with the goods or services can be recovered by the company (if input tax recovery conditions are met).
• The goods or services provided by the company may be used for the personal benefit of its employee. The VAT on purchases of goods or services is not recovered by the company.
• The VAT is recovered by the employer on purchased goods and services, but it has been used for the personal benefit of the employee. In such case the employer must account for VAT as a “deemed supply”.
• In case of a deemed supply, 5% VAT should be accounted for by the company on the cost value of the goods or services as if a taxable supply is made.

Companies should consider the following points when purchasing goods or services to be used by its employees:

• Whether the goods or services provided to an employee without consideration can solely be used for business purposes, or also for private purposes. If there is a potential private use of company assets by the employee, then determine what is the impact on the input VAT recovery on related purchases.
• In case a company recovers VAT on company assets provided to employees, then ensure that a strict company policy is in place prescribing the sole business use.
• As part of the company policy as mentioned above, employers should include the repercussions of not abiding by the policy by employees. Also, the employer should retain proof of action taken against employees not complying with the documented policy.
• Employers should weigh the cost of implementing the company policies against the amount of recoverable VAT on goods or services purchased to be used by its employees.