General Accountant, Elnaggar & Partners
Businesses increasingly establish reward programs to recognise employee performance, but this trend also brings about the potential for hidden or unforeseen VAT expenses, making employee awards more expensive than anticipated. Recognising high-performing staff with vouchers is a commonly adopted method, and a recent case has examined the VAT implications of this practice. While businesses might anticipate reclaiming VAT on assets purchased for staff, doing so raises the question of whether the business is also obligated to account for output tax.
For a transaction to fall under the purview of VAT, it necessitates the presence of a "supply" involving "consideration" within the framework of engaging in an "economic activity."
The actions carried out by an employee on behalf of an employer constitutes a provision of services. The remuneration, in the form of salary or wages, given by the employer to the employee in exchange for these services qualifies as consideration. Consequently, the crucial inquiry revolves around whether these activities, conducted within the context of an employment contract, qualify as an "economic activity."
The services provided by an employee are categorised as personal services, encompassing an individual's effort or labor as per contractual agreements. However, for VAT purposes, these services are not construed as constituting an economic activity. Consequently, any monetary compensation disbursed to employees under an employment contract falls outside the scope of the VAT regime. A non-exhaustive list of what cash benefits may include is as follows:
It is important to mention that agreements and payments involving "contracted labour" need careful examination. Depending on the specifics, even without a formal employment contract, it could be treated like an "employee/employer relationship" for VAT purposes.
Besides the salary paid for services under an employment contract, employees commonly receive extra benefits from their employer. It is crucial to assess these additional benefits individually to ascertain if there are any VAT implications for the employer and any actual VAT costs linked to the benefits.
Mobile phones, airtime, and data packages
In UAE businesses, companies regularly spend VAT on things like employee mobile phones and data plans. With the rise of remote work due to COVID-19, these expenses have become even more crucial.
A business is eligible to reclaim input tax for phones, airtime, and packages if these expenses are related to making it taxable supplies and certain conditions are fulfilled:
It should be noted that only documented policies that were already in effect when phones, airtime, and packages were provided to employees will be considered.
If all the requirements are not met, the recovery of input tax incurred for phones, airtime, and packages will be restricted in accordance with article 53(1)(c) of Cabinet Decision No. 52/2017 On the Implementing Regulation of Federal Decree-Law No. 8/2017 on the Value Added Tax.
Employee health insurance
Employee health insurance in the UAE allows employers to reclaim VAT spent on the coverage, given it is a mandatory requirement. In certain instances, the employer might offer health insurance coverage for the employee's family members. In these situations, the reclaiming of input tax is contingent upon the legal obligation of the employer to furnish health insurance for the employee's family, i.e., only if the employer is legally required to do so. Varying emirate-level laws on insurance requirements may affect the VAT treatment of family members' health insurance.
Input VAT deduction rules
To recover VAT incurred on purchases of goods and services, a taxable person in the UAE must satisfy specific conditions. In summary, these criteria can be outlined as follows:
It is crucial to highlight that, except for specified "special categories," VAT incurred on costs related to exempt supplies is not entirely recoverable from the relevant tax authority. This poses a challenge for businesses in sectors like financial services, real estate, and domestic transportation, subject to exemptions outlined in local laws under article 29 of the GCC VAT Agreement.
Blocked supplies refer to specific goods or services listed in local laws, for which no input VAT deduction is available, regardless of the nature of supplies a taxable person engages in. The expenses on which input VAT recovery is blocked can be categorised as follows:
Exceptions within local laws exist for employee non-cash benefits required by law or the employment contract for the employee to perform their role effectively. Determining whether an expense is deemed "personal”, or "entertainment" is subjective and requires careful consideration.
In the context of the above input VAT deduction rules, a taxable person should consider non-cash employee benefits such as:
It is essential to evaluate each benefit individually to determine the accurate VAT treatment and related obligations for the employer. In instances of uncertainty, the employer should consider seeking professional advice to mitigate the risk of misclassification and potential fixed or tax-related penalties resulting from any errors.
In cases where input VAT is recoverable for expenses related to non-cash benefits for employees, there might still be an obligation for a taxable person to report VAT on the "deemed supply" of goods or services to the employee. This implies treating the goods or services as if it were commercially sold to the employee for consideration, resulting in an actual VAT cost to the business. The authorisation for deeming provisions is stipulated in local laws and under article 8 of the GCC VAT Agreement.
These provisions aim to ensure the application of VAT on the ultimate consumption of goods or services, preventing the avoidance of VAT payment on end consumption when a business provides goods or services free of charge to its employees (or, in other cases, vendors, customers, etc.). In the context of employee non-cash benefits, deeming provisions typically come into play when VAT has been deducted by the business, and one of the following situations occurs:
Examples of such scenarios include a catering company buying food and drink for its taxable business, deducting VAT, and then providing a portion of the food free of charge to employees. Similarly, a legal firm buying laptops in bulk for all employees, deducting VAT, and then giving a laptop to an employee as a reward. Another example is a tax advisory firm offering free personal tax advisory sessions to employees and their families.
Although local laws outline certain thresholds and exceptions from deeming provisions, most of these are not applicable to non-cash benefits for employees and are more suitable for samples or commercial gifts provided to vendors or customers.
Considering the GCC VAT Agreement, various challenges may emerge, including:
Financial Controller and Tax Advisor
Elnaggar & Partners
Elleonor Grace E. Apostol
Elnaggar & Partners
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