Practitioners asked for it and here it came, another clarification. The UAE's FTA published its fifth public clarification, this time on entertainment expenses.
Article 53 of the UAE's Executive Regulations prevents the recovery of input VAT on entertainment expenses. The FTA distinguishes entertainment expenses for employees and non-employees.
VAT on entertainment expenses provided to non-employees, such as accommodation, food and drinks not provided during a meeting and access to shows or events, or trips provided for the purpose of pleasure or entertainment, is not recoverable.
This very strict and conservative position disallows pharmaceutical companies inviting their buyers to a conference in a hotel to deduct input VAT. A dealer holding a launch party for a new car model will also be prevented from recovering the input VAT on the food, drinks, band, etc. although it is clearly done with the objective of increasing sales. It is however allowed to provide potential customers with gifts (although these could constitute deemed supplies for which VAT is due).
For employees, VAT on employee expenses is recoverable if there is a legal obligation, a contractual obligation or documented policy (and a proven business practice) or a deemed supply which is accounted for.
The hotel stay paid to a new joiner before this joiner finds his own home is a recoverable expense. However, the lunch or dinner for employees (e.g. Iftar) is not.
Simple hospitality does not block you from recovering input VAT. Expenses qualify as simple hospitality:
- when the hospitality is provided at the same venue as the meeting
- if the meeting is interrupted only be a short break
- if the cost does not exceed internal policies
- there is no additional entertainment accompanying the food and beverages
A gala dinner where food and refreshments are considered to be so substantial that they constitute an end in themselves, will be considered as an entertainment expense.
Importantly, for conferences and business events, if a fee is charged for attendance input VAT is deductible, if not the catering services will not be deductible.
There are some interesting distinctions as well for sundry and pantry expenses. Tea and coffee is generally deductible, as well as flowers, chocolates and dates.
For staff parties no VAT is recoverable, neither for service awards, retirement gifts, Eid gifts, etc.
The clarification was much needed, as audits in the past few months have shown diverging interpretations of the term entertainment expenses.
Although seemingly anecdotal in nature, the business versus entertainment nature of expenses has proven controversial in all VAT jurisdictions around the world. It has lead to (Administrative) Supreme Court decisions in various countries.
It can be expected in the UAE that it will also be subject to controversy. Businesses will have to review their expense policies again as a result of the publication of this clarification. Especially documenting certain employee expenses will allow them to still recover the input VAT.