Article 53 of Cabinet Decision No. (52) of 2017 on the Executive Regulation of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (“VAT Executive Regulations”) stipulates input tax which is non recoverable by businesses (which, in most cases, will mean Taxable Persons).
There are a number of circumstances in which businesses have sought clarity over the definition of ‘entertainment’ for the purposes of the input tax restriction, and in particular what should constitute entertainment of staff or business contacts as opposed to incidental business-related expenses which would be recoverable under normal VAT rules.
This Public Clarification explains the application of Article 53 of the VAT Executive Regulations with regards to VAT which is non-recoverable in respect of entertainment or hospitality of any kind.
VAT incurred on any costs which are used for a genuine business purpose, or which are incidental to a business purpose e.g. food and drink provided during a business meeting, shall be recoverable (subject to normal VAT recovery rules). However, where the hospitality provided becomes an end in itself and could be construed as the purpose for attending an event, such costs will be considered to be entertainment in nature and the VAT incurred shall not be recoverable. More information on how to define whether costs are incidental to a business purpose, or considered to be an end in themselves, is provided below.
Entertainment provided to non-employees
Designated Government entities
Article 53(1)(a) of the Executive Regulations specifies that a Designated Government Entity (which is specified in a Cabinet Decision) is able to provide entertainment services to anyone not employed by the entity and shall be able to recover the input tax incurred on those costs.
This exception for Designated Government Entities only applies to entertainment provided to nonemployees. For example, the following forms of entertainment would be considered to be in the course of the activities of the Designated Government Entity and any VAT incurred should be recoverable:
See below for further comments on entertainment services provided to employees.
VAT registrants who are not Designated Government Entities
Input Tax shall be non-recoverable if it is incurred by a person in respect of entertainment services provided to anyone not employed by the person (see below for further comments on entertainment services provided to employees), including:
As a result, where a VAT registrant who is not a Designated Government Entity provides entertainment services to any non-employee, the VAT incurred on such costs shall be blocked from recovery in full.
This rule shall apply even where the business makes fully taxable supplies and would otherwise have the right to full input tax recovery.
Entertainment services are defined under Article 53(2) of the Executive Regulations as “hospitality of any kind” including the provision of:
Entertainment provided to employees
Where goods or services are purchased by any person to be used by employees for no charge to them and for their personal benefit, including the provision of entertainment services, then the VAT incurred on the cost is not recoverable unless an exception applies.
This means that any entity, including Designated Government Entities, which provide entertainment services to employees are prevented from recovering any VAT included on such costs.
The only circumstances in which a taxable person is entitled to recover VAT on such costs are:
For example, where a new employee joins a business and is provided with hotel accommodation for a short initial period prior to finding their own accommodation, this would not be considered entertainment and the VAT incurred on such costs would be recoverable, as this cost is necessary for the person to perform their role.
However, where a business organizes a lunch or dinner for employees e.g. a Ramadan Iftar, this would be considered to be entertainment and the VAT incurred on such costs would be blocked from recovery.
Definition of entertainment services
Food and drinks “in the normal course of a meeting”
The FTA considers that certain hospitality and entertaining expenses should be classed as normal business expenses which should not give rise to non-recoverable input tax under Article 53.
Where simple hospitality is provided in the normal course of a business meeting e.g. where simple food and refreshments are provided during the course of a meeting, the cost is considered to be recoverable.
The FTA considers the following criteria are indicative of simple hospitality provided during a business meeting:
However, where the food and refreshments are considered to be so substantial that they would constitute an end in themselves and may have encouraged someone to attend the meeting, the input tax incurred is non-recoverable. For example, a gala dinner event with a short introduction by a speaker would not be considered to be food and beverage in the normal course of a business meeting and the input tax incurred on costs would be blocked from recovery, where no charge is made for attendance.
Conference and Business events
Recoverability of input tax in respect of costs incurred for catering services during conferences and business events would be dependent on whether any fee is charged from the attendees, as detailed below:
Where the business cannot establish or is uncertain whether or not hospitality is provided in the normal course of business meeting, it should refrain from recovering input tax on the expenses.
Sundry office expenses
The FTA considers that certain normal incidental office expenses for general use by both employees and visitors does not give rise to non-recoverable input tax under Article 53. Examples of sundry office expenses on which the FTA accepts a business should be entitled to input tax recovery include:
Where events are held purely for the purposes of entertaining staff, for example staff parties, the VAT incurred on the associated costs shall be blocked from recovery unless a charge is made to the employee for attending.
Taxable Persons may also purchase goods or services to be given away to staff free of charge, in order to reward them for long service, for example.
Based on the provisions of Article 53, the VAT incurred on such costs should be blocked from recovery.
Examples of the type of gifts given away free of charge on which VAT recovery would normally be prevented (unless the business accounts for a deemed supply) would include:
There will also be circumstances where a taxable person will fund or reimburse an employee for certain costs which the employee incurs for business purposes, in the course of performing their role. In such cases, the costs are considered to be genuine business expenses and the VAT incurred is recoverable where a tax invoice is provided and the cost is for business purposes.
An example of costs incurred by an employee which the FTA considers should be recoverable by the business (subject to normal VAT recovery rules) include:
If the employee incurs costs which are related to entertaining a current/potential customer/supplier then any associated input tax incurred will be non-recoverable.