FTA sets criteria for VAT recovery on entertainment expenses

dubai — The Federal Tax Authority (FTA) on Monday said Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT) states that companies cannot recover VAT incurred on expenses related to activities to entertain staff.

This also includes goods and services purchased to be given away to staff free of charge in order to reward them for long services such as long service awards, retirement gifts, Eid gifts, or gifts for other festivals or to reward other services.

In a recent press statement, the FTA clarified that entertainment services consist of “hospitality of any kind” including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting; and access to shows or events, or trips provided for the purposes of pleasure or entertainment.

The authority further explained that, on the flip side, if a designated government entity provides entertainment services to anyone not employed by the entity, it shall be eligible to recover the input tax incurred on those costs. This exception pertains only to entertainment services provided to non-employees, including: meetings with delegations from other countries where lunch or dinner is provided; meetings with representatives from other government entities to discuss official business, where refreshments are provided; or ceremonies held to mark significant political events, e.g. the signing of an international agreement, where entertainment is provided to the audience.

The FTA noted that 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: where it is a legal obligation to provide those services or goods to those employees; it is a contractual obligation or documented policy to provide those services or goods to those employees so that they may perform their role and it can be proven to be normal business practice; and where the provision of goods or services is a deemed supply under the provisions of the Decree-Law.

As for employee expenses, the authority outlined certain circumstances where a taxable person will fund or reimburse an employee for certain costs that the employee incurs for business purposes, in the course of performing his/her role.

These include cases where an employee is on a domestic business trip and requires overnight accommodation, the VAT incurred on hotel costs, for example, would be recoverable; as well as input tax incurred on subsistence costs, e.g. food and drinks purchased by the employee for their own consumption during the business trip.

Nevertheless, if the employee incurs costs which are related to entertaining a current or potential customer/supplier, then any associated input tax incurred will be non-recoverable, FTA said.