Businesses in the UAE are often bewildered by the tax treatment of VAT paid on motor vehicles while self-assessing their VAT liabilities. This could be possible because of two reasons first being a special transaction that is not normal in day to day business and the second being that the amount of tax paid is often significant. VAT Law read with Executive regulations has outlined specific provisions in this regard. We have tried to present them here in a systematic way for the guidance of tax registrants.
Definitions
Before jumping into analysis let's learn a couple of definitions relevant to our analysis.
- Taxable Supply:
A supply of Goods or Services for a Consideration by a Person conducting Business in the State, and does not include Exempt Supplies. - Input Tax :
Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import. - Recoverable Tax:
Amounts that were paid and can be repaid by the Authority to the Taxpayer pursuant to the provisions of the Decree-Law.
Relevant Provisions in the Law and Regulations
- Clause (5) of Article (54) of VAT Decree-Law
The Executive Regulation of this Decree-Law shall specify the instances where Input Tax is excepted from being recovered. - Clause (1) of Article (53) of Executive Regulations
Inter-alia, Input Tax shall be non-recoverable if it is incurred by a person in respect of the following Taxable Supplies :
Where a motor vehicle was purchased, rented or leased for use in the Business and is available for personal use by any person. - Clause (2) of Article (53) of Executive Regulations
Inter-alia, the phrase “motor vehicle” shall mean a road vehicle that is designed or adapted for the conveyance of no more than 10 people including the driver. A motor vehicle shall exclude a truck, forklift, hoist or other similar vehicles. - Clause (4) of Article (53) of Executive Regulations
A motor vehicle shall not be treated as being available for personal use if it is within any of the following categories:• a taxi licensed by the competent authority within the State;
• a motor vehicle registered as, and used for purposes of an emergency vehicle, including by police, fire, ambulance, or similar emergency service;
• a vehicle which is used in a vehicle rental business where it is rented to a customer.
Analysis
- Decree-Law specifies the list of transactions whereby the Input-VAT can be recovered and also gives the power to Executive Regulations to come up with instances whereby it cannot be recovered.
- Under powers given by Decree-Law, the Executive Regulations includes Article (53) outlining the instances whereby the Input Tax cannot become Recoverable Tax. i.e. cannot be adjusted while assessing VAT liability and hence becomes part of the cost of the tax registrant.
- Among other things, Article 53, provides that whereby a motor vehicle is purchased, rented or leased for business use and is available for personal use by any person, the tax paid cannot be recovered. The important point to note here is actual use is irrelevant, if the motor vehicle is even available for personal use, its not qualified for recovering the Input VAT paid.
- The idea here is to disallow VAT credit on motor vehicles that may be used for the personal purposes of any person.
- However, since motor vehicles are a crucial part of running the daily operations of most businesses and particularly those businesses that deal in providing services related to motor vehicles, the Law has provided certain relaxations by defining what will not be termed as a motor vehicle for the purposes of Article 53, and by defining what will not be termed as personal use. So, if a motor vehicle passes either of these tests, the VAT can be recovered in a normal course.
- Vehicles used purely for commercial purposes like a truck, forklift, mini-truck, lorry and other similar vehicles will not be termed as motor vehicles for Article (53) and hence normal provisions will apply to them. i.e. Input VAT paid can be recovered in the normal course.
- Motor vehicles though carrying individuals for their personal purposes shall not be treated as being used for personal purposes if its a Licensed Taxi or an emergency vehicle like ambulance, police patrol cars, fire or other motor vehicles being used in other similar emergency services or if the motor vehicles are being used in a Vehicle Rental Business where it is rented to the customer (Rent a Car Businesses).
Conclusion
The law has made its intention amply clear by defining the term Motor Vehicle and by defining Personal Use in a negative approach (i.e everything is personal use except..).
Therefore a Tax registrant must make sure that either the purchased, rented or leased motor vehicle is not a motor vehicle as per Clause (2) or Article (53) or if it’s a motor vehicle as per the said article, it’s treated as not being used for personal purposes as per Clause (4) of Article 53 and only then must recover the VAT paid on such motor vehicle(s).
Disclaimer
Content is posted for informational & knowledge-sharing purposes only and is not intended to be a substitute for professional tax advice. The interpretation made by the author is based on the available Law, regulations, market practices and professional experience. The reader should consult their tax advisor before taking any action after reading the contents of the above post.