This blog provides information on Input Tax Apportionment relevant to any taxable person who makes taxable supplies. In conducting business activities, a taxable person may incur expenses that are subject to VAT (Input VAT credit).  This can be recovered by them, subject to certain conditions. This is to ensure that VAT will not be a cost to such a taxable person. Under Article 54(1) of the VAT Decree-Law, a business can recover input tax incurred on goods and services that are used or are intended to be used, for making taxable supplies. Accordingly, where purchases are for exempt supplies or non-business activities, then the input tax is not recoverable. 

Input tax which is incurred in respect of purchases which are used partly for making supplies that allow for VAT recovery and partly for making supplies for which VAT is not recoverable is known as “Residual Input Tax”, and it must be apportioned between those supplies.  Recovery will be restricted to the proportion relating to supplies that allow for VAT recovery. The percentage of VAT paid on purchases attributing to supplies for which VAT cannot be recovered needs to be calculated. Applying this percentage on the total VAT paid will help us find out the Input VAT credit we cannot claim from the FTA. 

The FTA accepts, however, that the standard method of apportionment may not be appropriate in every situation.  Each business is different, and the standard method of apportionment may give rise to outcomes that might not be reflective of the actual use of goods or services by the business.  As a consequence, the FTA is introducing a number of alternative methods of input tax apportionment to be used where the standard method does not provide an outcome that is reflective of the actual use of the acquired goods or services.  

The special input tax apportionment methods which are available to taxable persons are:

  1. Outputs based method;
  2.  Transaction count method;
  3.  Floorspace method; and
  4. Sectoral method.

To be eligible to apply for the special method of input tax apportionment, all of the following conditions must be met:

  • The applicant has been registered for VAT for at least 6 months;
  • The applicant makes both taxable supplies and exempt supplies; and
  •  The standard method of input tax apportionment does not give a fair and reasonable result to input tax recovery. 

Submissions will be accepted where they are submitted by the applicant himself or on behalf of the applicant by either the appointed tax agent or the appointed legal representative.