At the end of each tax period, a VAT registered business will either be due to pay tax to the FTA or get a refund depending on the amount of Input and Output tax incurred in that period.
Output VAT is the amount of tax you charge on the sales of your own goods and services both to ordinary customers and other entities if you’re registered for VAT. Input VAT is the amount of value added tax you’ve paid during the purchases of goods and services during a tax period. If the amount of Input VAT you’ve paid is lower than the amount of Output VAT you’ve charged, you’re due a net tax credit for the amount of the difference between those values. If the amount of Input VAT you’ve paid is larger than the amount of Output VAT you’ve charged, you’re due for a tax refund from the FTA.
In order for input tax to be deductible, a number of conditions must be satisfied by the recipient of the supply:
- Recipient must be a taxable person and must be registered for VAT
- VAT on the purchase must have been correctly charged by the supplier
- The goods or services have been acquired for an eligible purpose
- Recipient must receive and retain a tax invoice evidencing the transaction
- The amount of VAT which the recipient seeks to recover must have been paid
- Certain incurred VAT is specifically blocked from being recoverable as input tax regardless of whether the above conditions have been met.
Personal expenses incurred by the Directors but paid by the company would be non-reclaimable. VAT would also not be reclaimable on Client Entertainment expenses and Motor vehicle expenses, when the vehicle is available for personal use.
Employee entertainment expenses are non-reclaimable, except in cases where it is:
- Legal obligation to provide such goods or services under any applicable labor law
- Contractual obligation or are provided as a matter of policy, and can be proven to be normal business practice.