Many businesses face this harsh reality: not all VAT paid can be recovered. When supplies are both taxable and exempt, the VAT rules require you to divide the claim.
The real issue is not the rules themselves, but applying them correctly in day-to-day accounting. Businesses often use the wrong method, skip annual checks, or ignore special rules for large assets.
The solution is to understand how apportionment works and how the Capital Assets Scheme (CAS) protects fairness over time. With these tools, VAT recovery becomes more reliable and less risky.
Let Tax Gian explain how it works. For particular issues, visit our expert VAT agents in the UAE.
Why Input Tax Apportionment Matters
When a business only makes taxable supplies, VAT recovery is simple; everything is deductible. But when exempt supplies are also made, only part of the VAT can be claimed. Apportionment is the process of splitting input VAT between deductible and blocked amounts.
This ensures that recovery reflects the true use of goods and services in the business.
When Businesses Must Apportion
Apportionment applies when expenses are linked to both:
- Taxable supplies, and
- Exempt or non-business supplies.
VAT that relates entirely to taxable supplies is recoverable in full. VAT that relates fully to exempt supplies cannot be recovered. Mixed-use items must be apportioned.
Steps in Apportionment Calculation
The standard calculation involves four main steps:
- Identify input tax directly linked to taxable supplies → recover in full.
- Identify input tax directly linked to exempt supplies → cannot be recovered.
- Calculate the ratio of taxable supplies to total supplies, round to the nearest whole number.
- Apply that ratio to the input tax linked to both taxable and exempt supplies.
The sum of step 1 and step 3 gives the recoverable amount for the period. Still confused? Consult our expert VAT agents in Dubai.
Practical Example
Consider a business leasing property in the UAE:
- VAT on residential repairs (exempt): AED 50,000→ not recoverable.
- VAT on commercial repairs (taxable): AED 100,000→ fully recoverable.
- VAT on shared costs (mixed use): AED 75,000.
Taxable vs. total supplies ratio = 100,000 ÷ 150,000 = 66.67% (rounded to 67%).
Recoverable VAT on shared costs = 67% × 75,000 = AED 50,250.
Total recoverable input VAT = 100,000 + 50,250 = AED 150,250.
This shows how a clear calculation prevents disputes.
Annual Adjustment Requirement
Apportionment is not a one-time process. Businesses must calculate it for every tax period and also perform an annual adjustment.
The annual check compares the VAT recovered during the year with what should have been recovered on a yearly basis. This smooths out seasonal changes and ensures fairness.
If the review shows under-recovery, the tax authority owes you a refund. If it shows over-recovery, you must repay the difference. The adjustment is made in the first return after the tax year ends. You can take help in filing tax returns from our professional VAT agents in Dubai.
Alternative Methods and FTA Approval
Sometimes the standard formula does not reflect actual use. If the difference exceeds AED 250,000, businesses must either:
- Adjust using a method that better reflects usage, or
- Apply to the Federal Tax Authority (FTA) for approval of a special method.
If approved, the new method must usually be applied for at least two years (sector-specific) or four years (general). This ensures consistency and prevents frequent changes.
Understanding the Capital Assets Scheme (CAS)
The Capital Assets Scheme is designed for large purchases. It ensures VAT recovery matches how assets are used over time, not just in the year of purchase.
A capital asset is:
- Any item worth AED 5,000,000 or more (excluding VAT),
- Subject to VAT at the standard rate,
- With a useful life of at least 10 years for buildings or 5 years for other assets.
Examples:
- A building constructed for AED 7,200,000 → qualifies.
- A computer system purchased for AED 5,000,000 with a 7-year life → qualifies.
- A 5-year lease of a building worth AED 10,000,000 → does not qualify, as the useful life condition is not met.
Monitoring Use Over Time
Input VAT on capital assets is claimed at purchase, but must be checked annually through CAS adjustments.
For buildings, the adjustment period is 10 years. For other assets, it is 5 years.
Each year, the business compares:
- The recovery allowed in the current year, and
- The recovery made in the first year.
If the current year’s use allows more recovery, the difference can be claimed. If it allows less, the difference must be repaid.
How can Tax Gian help?
Input tax apportionment and the Capital Assets Scheme may appear complex, but they share a common purpose: fairness. They ensure VAT is recovered only to the extent that goods and services are used for taxable business activity.
Just like that, Tax Gian ensures that businesses receive the necessary information through its website. Our expert VAT agents in the UAE make additional efforts to help businesses understand their tax liabilities, resolve tax issues, and comply more effectively.
