How to Calculate Input VAT Adjustments Under Capital Assets Scheme?

With the Capital Asset Scheme, the taxpayers can adjust the initially recovered Input Tax on Capital Assets based on actual use during a specified time of 10 or 5 years. Considering the intended nature of the usage, the businesses can recover the input VAT paid on the capital goods in the first year. The entities need to carry out an input VAT adjustment on the VAT recovered earlier if there are any changes in the usage of the capital goods. However, this would lead to additional VAT payable to FTA or additional VAT recoverable from the FTA.

Calculation of Input VAT adjustments under the Capital Asset Scheme may appear complex to the VAT registrants but they can avail the services of registered tax agents in Dubai for assistance. Read below for more details about the Capital Asset Scheme and the methods to calculate Input Tax adjustments under the scheme:

What are Capital Assets as per UAE VAT Law?

Article 57 of the Executive Regulations of VAT Law defines a Capital Asset as a single item of expenditure of the business that amounts to AED 5,000,000 or more excluding VAT. VAT is payable on the asset and must have a useful life that is equal to or longer than

  1. 10 years for a building or parts of the building
  2. 5 years for other Capital Assets

In certain instances cases, the expenditure composed of smaller sums that collectively amount to AED 5,000,000 will be treated as a single item. This is applicable for:

  1. Purchase of a building
  2. Construction of a building
  3. Works were undertaken on a building such as extension, refurbishment, renewal. However, if there are distinct breaks between any such works they should be considered as separate items of expenditure
  4. Purchase, construction, assembly or installation of any goods if the components are supplied separately for assembling

The taxable entities are recommended to seek assistance from registered tax agents in Dubai. The tax agents from experienced VAT consultancy firms in Dubai will help the businesses in ensuring VAT compliance. Apart from compliance, the taxpayers get to know how to calculate the Input VAT adjustments under the Capital Asset Scheme.

Calculation of Input VAT Adjustment Under Capital Assets Scheme

Tax registrants need to calculate the input VAT adjustment under the capital assets scheme using certain specialised methods. Registered tax agents in Dubai, UAE advise the businesses to stick to the following steps for the process:

  1. Determine the total input VAT on the particular capital good
  2. Divide the total input tax with the useful life of the assets. In the case of a building, it is 10 years and in other cases, it is 5 years
  3. Multiply the resultant from the above with the change in usage, which is the difference between intended usage while recovering the Input Tax in the first year and actual usage in that year

Illustrating Input Tax Adjustments with Example

Imagine you have purchased a commercial property to start a wholesale grocery store and paid a VAT of AED 200,000 AED in January 2018. Your intended use of the property is to supply grocery products. In this case, you can recover 100% of the VAT paid on the purchase of the property in the first year itself. This is because you intend to use the commercial property to make taxable supplies.

In the year 2022, you have started an agency in the same building to deliver taxi service for passengers. This service comes under the local passenger service category and is an exempted supply of service under VAT in the UAE. Also, 40% of the building is now used as a taxi service agency. Here, there is a change in the usage of the property since 2022.

The building is now used for making taxable supplies as well as making an exempt supply. This means there is a change in the use of Capital Assets and you need to make input VAT adjustment from 2022 to 2027 as the useful life of a commercial building is considered as 10 years. Hence using the above formula, the input tax adjustment for year 2022 will be: (AED 200,000 * 40% ) / 10 Years= AED 8000.

How Registered Tax Agents in Dubai Can Help You?

Taxable businesses that own Capital Assets are allowed to recover the input tax in the year of acquisition under the Capital Asset Scheme as per UAE VAT Law. However, registered tax agents in Dubai recommend the businesses track the usage of the capital assets for VAT purposes considering the long useful life of the Capital Goods. Such entities need to make input VAT adjustments depending on the change in intended usage of the capital goods as illustrated in the example given in the blog. By enlisting the services of the best VAT consultancy firms in Dubai such as Jitendra Chartered Accountants (JCA) the businesses can avoid the complexities of the process.

JCA has a dedicated team of highly experienced VAT specialists experienced in all the industry sectors that require Input Tax Adjustments and the Capital Asset Scheme in the UAE. JCA’s registered tax agents in Dubai assist the businesses by calculating annual Input Tax Adjustments, under the Capital Asset Scheme with a specialised methodology that ensure VAT compliance.

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