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VAT on capital asset paid will be recovered over a period of 10 consecutive years or part thereof for building or 5 consecutive years or part thereof for other capital assets.

Capital assetValueUseful LifeRecovery
Building5,000,000 or more10 yearsOver a period of 10 years
Other capital assets5,000,000 or more5 yearsOver a period of 5 years
BuildingLess than 5,000,00010 yearsWill be recovered in the tax period in which asset is purchased
Other capital assetsLess than 5,000,0005 yearsWill be recovered in the tax period in which asset is purchased
Building5,000,000 or moreLess than 10 yearsWill be recovered in the tax period in which asset is purchased
Other capital assets5,000,000 or moreLess than 5 yearsWill be recovered in the tax period in which asset is purchased

Calculation of recovery of VAT on capital asset

Commercial building purchased amounting to AED 5,450,000 excluding tax used for the purpose of producing both commercial and exempt products. VAT paid on the purchase of the building is AED 272,500. The building is used for providing both taxable (including export) and non -taxable supply. Input tax incurred for providing taxable supply is AED 505,400 and for non-taxable supply is AED 375,100

In the given example, full input tax cannot be recovered. Input tax incurred on supplies partly used for making taxable supply and partly other supply then input tax to be recovered shall be calculated as:

  1. Percentage of recoverable input tax will be calculated –

Input tax recoverable used only for the purpose of providing taxable supply ÷ (Input tax recoverable used only for the purpose of providing taxable supply + Input tax recoverable used only for the purpose of providing the non-taxable supply only)

= 505,400 ÷ (505,400 + 375,100)

= 57.39%

=57%

Round off the percentage to the nearest number

  1. Multiple the percentage of recoverable input tax to the amount of VAT paid for making both taxable and non-taxable supply.

= AED 272,500 X 57%

= 155,325

Percentage of recoverable tax will change every tax period.

Calculating input VAT recoverable on capital asset:

  1. Input tax will be recovered over a period of 10 years

= 155,325 ÷ 10

  1. Input tax recovered in year 1 (as calculated in point 1 above) will be compared with input tax recovered calculated in year 2
  2. If input tax recovered in year 1 is not equal to input tax recovered in year 2 then the taxable person shall further calculate:
  • Amount of recoverable input tax as per the recoverable rate of year 1

= 272,500 ÷ 10 X 57%

  • Amount of recoverable input tax as per the recoverable rate of year 2

= 272,500 ÷ 10 X 45% (assumed recoverable rate for year 2 as 45%)

If the amount of input tax recoverable in a subsequent year (year 2) is more than the amount of input tax recovered in year 1, the input tax recoverable will be reduced in year 2 to make it equal to the recoverable tax of year 1.

If the amount of input tax recoverable in a subsequent year (year 2) is less than the amount of input tax recovered in year 1, the input tax recoverable will be increased in year 2 to make it equal to the recoverable tax of year 1.

How to calculate recoverable VAT?

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The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.. It doesn't constitute professional advice or a formal recommendation. The author has undertook utmost care to disseminate the true and correct view and doesn't accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information's provided herein above.

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