Firms can't recover VAT on entertaining non-employees

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.

Companies in the UAE will not be able to recover value-added tax (VAT) paid on entertainment expenses for non-employees, according to a new clarification issued by the Federal Tax Authority (FTA).

Thomas Vanhee, partner at Aurifer Middle East Tax, said 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.

The new clarification distinguishes entertainment expenses for employees and non-employees, he added.

"This very strict and conservative position disallows pharmaceutical companies inviting their buyers to a conference in a hotel to deduct input VAT; [plus] 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," Vanhee said.

The UAE and Saudi Arabia implemented 5 per cent VAT on a number of goods and services - including entertainment - from January 1, 2018.

However, VAT on employee expenses is recoverable if there is a legal, contractual obligation or documented policy, explains the FTA clarification.

Vanhee explained that the hotel stay paid to a new joiner before s/he finds his/her own home is a recoverable expense. However, the lunch or dinner for employees (e.g. Iftar) is not.

According to the FTA's clarification, 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.

For staff parties, no VAT is recoverable, neither for service awards, retirement gifts, Eid gifts, etc.

"Businesses will have to review their expense policies as a result of the publication of this clarification. Especially documenting certain employee expenses will allow them to still recover input VAT," Vanhee concluded.

- waheedabbas@khaleejtimes.com