The United Arab Emirates has clarified the application of value-added tax to accommodation provided by employers. VAT Public Clarification VATP003, published by the Federal Tax Authority, distinguishes between residential accommodation, which is zero-rated on first supply and afterward exempt, and standard-rated service accommodation. “The clarification is important for the numerous companies in the UAE which have an extensive labor force and provide housing to their employees. This is customary for laborers in the construction sector,” said Thomas Vanhee, founding partner at Aurifer Tax Advisers in Dubai.
Where employers supply “incidental” services such as cleaning communal areas, garbage collection, access to a pool or gym within the building, and basic building maintenance, the accommodation will be zero rated. The supply of additional services including telephone or internet, laundry, catering, pest control, room cleaning and fresh bed linen will be considered “serviced accommodation” and subject to value-added tax. There will be implications for recovering tax on expenses, Vanhee said by email July 5. “No input VAT is deductible with respect to the business offering exempt residential rent, contrary to a business offering taxed serviced property,” he said.
The clarification also addresses whether the accommodation is “a single composite supply” of either type, or “a mixed supply with separate component parts.” “Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component,” the circular says. “Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.” “This is an area that often causes problems for business as, in the case of a single composite supply, the entire consideration is subject to the VAT treatment of the principal component, whereas in a mixed supply, each component must be valued and a VAT treatment applied to it,” A big 4 said in a circular emailed to clients July 3. “One criteria that the FTA will consider to be crucial is that a single composite supply must have all components supplied by a single supplier. If the components come from multiple suppliers, it will not be treated as a single composite supply, and the tax treatment of each component must be individually evaluated.”
‘Scores of Clarifications’
The treatment of mixed supplies “has been an area of some complexity in the U.K., and it deserves a Public Clarification of its own,” said a tax and public policy partner at a law firm in London, by email July 5. He expects “scores of Public Clarifications to emerge” as the UAE fine-tunes its VAT regulations, he said. More details may be required on this subject, Vanhee said. “The clarification does not discuss any cases in which the building is located in a Designated Zone,” which is not subject to VAT, he said. Suppliers could face “considerable fines” if they don’t treat the accommodation supplies correctly, said a partner at a law firm in Dubai. “Each provider will still need to make an individual assessment of the correct approach to take, but they will now be better informed as to the way in which the FTA will review the treatment that has been selected,” he said by email July 5. However, what isn’t clear is the impact the new clarification will have on providers that have previously taken an alternative interpretation to that provided by the FTA with this new clarification. “The providers will need to assess whether or not this will mean that any previously filed VAT returns will need to be re-submitted and VAT claimed from customers where it was not previously the case,” he said.
Reproduced with permission. Published July 6, 2018. Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.