The Federal Tax Authority (FTA) has issued important clarifications regarding the non-recoverability of Input Tax on entertainment expenses under VAT law in the UAE. These guidelines provide businesses with greater clarity on when VAT paid on entertainment expenses can or cannot be recovered, ensuring compliance with the VAT system outlined in the Federal Decree Law No. 8 of 2017.
Key Points on Entertainment Tax Recovery
According to Article 53 of Cabinet Decision 52, Input Tax paid on entertainment services is generally not recoverable. However, there are exceptions that businesses should be aware of to ensure proper VAT treatment:
Entertainment for Employees: Input tax paid on entertainment services can be recovered if it is legally required to be provided to employees or explicitly stated in the employment contract. However, the entertainment services must be deemed necessary for the employee’s duties and typically offered within the industry.
Deemed Supply: Entertainment services that are classified as a deemed supply under VAT regulations are also eligible for input tax recovery.
What Constitutes Entertainment Services?
The FTA has outlined that expenses directly related to business activities may be claimed as a business expense. These expenses can include incidental items necessary for conducting business, such as refreshments for a business meeting. However, the cost of lavish entertainment—such as a dinner during which a keynote speech is delivered—will not qualify for VAT recovery.
Entertainment Expenses for Non-Employees
The clarification also draws a distinction between Government and Non-Government entities when it comes to entertainment expenses for non-employees.
For Government Entities:
VAT on entertainment expenses incurred by government entities is recoverable in cases where the expenses are for interactions with external parties, such as other delegations, representatives, or ceremonial events. However, VAT recovery is allowed only if the entertainment is provided to individuals not employed by the entity.
For Non-Government Entities:
For businesses and private companies, VAT on entertainment expenses provided to non-employees—including customers, potential customers, officials, shareholders, and investors—is generally non-recoverable.
VAT on Entertainment Provided to Employees
In general, VAT incurred on entertainment expenses for employees’ personal use is blocked from recovery. However, there are exceptions. For instance, if a company provides accommodation to a new employee for a few days in a hotel until they find permanent housing, VAT can be recovered on these costs, as it is considered a standard business practice.
What Defines Entertainment Services?
One of the common inquiries the FTA receives is whether VAT can be recovered on food and beverages provided during a business meeting. The FTA has clarified that simple refreshments—such as basic food and drinks—served during a business meeting are recoverable, as long as the following conditions are met:
The venue where food and drink are served is the same as the meeting location.
The refreshment break is short and does not significantly interrupt the meeting.
The cost per person does not exceed internal policies for employee subsistence claims.
The food and beverages are not accompanied by entertainment (e.g., live music, performances, etc.).
If the food and beverages are extravagant to the point where they become the main attraction, rather than being incidental to the meeting, these expenses will be classified as entertainment and VAT cannot be recovered.
VAT on Conferences and Business Events
The FTA has also clarified the treatment of VAT on expenses associated with conferences or business events. Here are two key rules to follow:
If a fee is charged for attending the event, VAT can be recovered on associated costs.
If no fee is charged, VAT cannot be recovered on the expenses related to the event.
It is important that businesses do not claim VAT unless they are completely certain of their eligibility. If there is any doubt, the business should avoid claiming input VAT.
Sundry Staff Expenses: What’s Recoverable?
The FTA also issued clarification on incidental office expenses incurred for employees that do not incur any additional costs. For instance, VAT on the following expenses is recoverable:
Tea, coffee, and similar refreshments available for general use by employees and non-employees.
Decorative items, such as flowers at the reception area.
Free snacks, such as dates and chocolates offered to employees and visitors.
However, VAT cannot be recovered on company functions, galas, or other events unless attendees are charged a fee.
Employee Business Expenses
If an employee incurs expenses related to business duties, such as accommodation or meals, and the business reimburses these costs, VAT on the expenses is recoverable. The following conditions must be met:
The expense must be directly related to business operations.
A valid tax invoice must be obtained for the expense.
This ensures that businesses can reclaim VAT on legitimate business-related expenses, even if incurred by employees.
Conclusion
The recent clarification from the FTA provides essential guidelines on Entertainment Tax and the recovery of Input VAT on entertainment expenses in the UAE. While VAT on entertainment expenses is generally non-recoverable, businesses can claim VAT on expenses that are deemed necessary for conducting business activities, as long as they meet the specified criteria.
Understanding the nuances of these guidelines will help businesses ensure compliance with VAT regulations and avoid errors in their VAT returns. Always err on the side of caution—if in doubt, consult with a tax professional to ensure the correct treatment of VAT on entertainment expenses.
By following these updated rules, businesses can better navigate the complexities of the UAE VAT system while minimizing risks and ensuring smooth operations.
