VAT in UAE is here, and it’s shaking up how businesses account for their activities. Sure, 5% is not too much to start. But when you’re used to no VAT, it’s an adjustment, for sure.
While we spend most of our time discussing the tax ramifications on bought and sold goods and services, there’s one, important category that’s easy to overlook:
As you know, capital assets are the lifeblood of a company’s operation and success. The company computer or cell phone your using right now is a Capital Asset. These assets facilitate business yet do so in the background. Simply put, Capital Assets are…
- Used in the business.
- Designated for long-term use
Until now, you might understand capital asset purchases are Input Tax recoverable under VAT. But what about input VAT recovery on higher-valued capital assets?
Unfortunately, it’s not the same…
Time to buckle up, and learn about the Capital Assets Scheme
What is The Capital Assets Scheme?
Before we get into how the capital assets scheme works, let’s be clear: It only applies to certain, defined capital assets, such as
- A single, VAT payable item of business purchase of AED 5,000,000 or more (excluding Tax)
- Asset estimated to be useful for 5-10 years or longer. 10 years of use – If the asset is a building or part of one. 5 years of use for all other non-building assets.
Simple to follow, right? Now here comes those regulatory fine details…
What if the business purchases an asset worth AED 5,000,000 or more in instalments, over time? Can it be treated as one purchase under VAT? Yes, IF it’s to purchase any of the following:
- Building construction
- Building extensions, refurbishments, renewals, a fitting out or other work.
- Not eligible if there were large time breaks between projects (considered separate purchases)
- Goods/immovable property purchased, constructed, assembled or installed using separately supplied components for assembly.
Long Asset Time Horizons and Accurate Accounting
Okay, we kept you waiting long enough. Here is how the Capital Assets Scheme works:
Your company purchases a Capital Assets Scheme (CAS) asset. It is able to recover Input VAT on that purchase in the first year. But only if the asset will be used to produce taxable supplies during a specific time, like 10 years.
What if you use the asset for non-business purchases or to produce exempt supplies?
Then, the company must reverse the proportionate input VAT to the extent of non-taxable usage. Once finished, you report the reversal as a capital assets adjustment when filing VAT returns for the particular year.
The main goal here to accurately account for the asset’s use. Things change. So can the purpose of an asset.
Apply This Capital Assets Scheme Example To Your Business
To demonstrate how CAS operates, let’s get into the nuts and bolts:
SSS Enterprise acquires a machine for AED 20M. The company pays a VAT of AED 1M and intend to use the machine for at least 5 years.
- During the first year, SSS determines that 50% of the machine’s use will produce taxable supply. So they calculate a recovery of AED 500K in the first year.
- Original VAT = AED 1,000,000 X 50%
However, they must account for that first year’s AED 500K recovery over 5 years. So in reality, they are recovering 100K per year – 500,000 /5 = AED 100,000.
- The next year, the SSS Enterprise realizes the taxable use of the asset was only used 40%. Thus, they must account for the difference from original usage. How? By multiplying the 100K recovered for year 2 by 10%, the usage difference between the first and second year:
- 100,000 X (50% – 40%) = AED 10,000 Payable to FTA, Adjustment for actual use
- Next, the third year comes and goes. SSS Enterprise determines the machine is back up to 50% usage towards taxable supply, matching original estimates. No adjustment this year!
- The fourth year sees SSS Enterprises using the machine to produce 60% of taxable supply. Back to the drawing board…
- 100,000 X (50% – 60%) = AED (10,000) Recovery (To be claimed in the input tax) Adjustment for actual use
Pretty awesome how that works, right? Again, the formula is:
Total VAT on purchase/No. years (5 or 10) X (Initial% – Actual %) = CA Adjustment
What if Your Company Sells Its Capital Asset?
Your company is trying to raise cash so it sells a capital asset (under the Capital Asset Scheme) before the end of its 5 year usage. How do you account for this?
First, make the normal adjustment as demonstrated above. You will calculate this as if the asset was used for the whole year.
Next, make a sale adjustment.
For a sale adjustment, use the normal adjustment formula, but only for the remaining years of the asset’s life.
If the sale of your asset is taxable, declare the the taxable use of the rest of the asset’s life as 100%.
And if the sale is exempt? Assume 0% taxable use for the remaining year.
Let’s say the asset was sold in its fourth year of operation, using the SSS Enterprise example. This is how we’d calculate:
- Normal Adjustment – 100,000 X (50% – 60%) = AED 10,000 Recoverable
- Sales Adjustment
- Sales as Taxable Supplies – Sale happened as taxable supply – 100,000 X (50% – 100%) X 1 = AED 50,000 Recoverable
- Sales as Exempt Supplies – Sale happened as exempt supply – 100,000 X (50% – 0%) X 3 = AED 50,000 Payable to FTA
Hopefully our discussion on Capital Assets Scheme was enlightening for you. This is one we suggest rereading to ensure your understanding. Especially because there’s multiple steps and time frames in this process.
For more information, check out the Final UAE VAT Executive Regulations, particularly Article 58 concerning The Capital Assets Scheme.
Did we cover everything on Capital Assets Scheme? Do you still have questions? If so, feel free to shoot us an email at Dhariba.com for all your tax questions and needs. Or just leave us a comment below.