VAT ON ENTERTAINMENT EXPENSES PROVIDED TO NON EMPLOYEES

INTRODUCTION

5% VAT on a number of goods and services including entertainment was implemented in the UAE and Saudi Arabia from January 1, 2018. The Federal Tax Authority keeps on issuing clarifications related to VAT and has recently issued a new clarification according to which the Companies in the UAE would not be able to recover the Value Added Tax which is paid on the entertainment expenses for non employees and also distinguishes entertainment expenses for employees as well as non employees.

As per the new clarification, the business would be required to review their expense policies and documentation of certain employeee expenses would allow them to recover input VAT.  

WHAT WOULD BE CONSIDERED AS AN ENTERTAINMENT EXPENSE ?

As per the clarification, a gala dinner where food and refreshments are considered to be substantial that they constitute and end in themselves would be considered as an entertainment expense.

IS THE VAT PAID RECOVERABLE?

• If there is a legal, contractual obligation or documented policy, then VAT on employee expense would be recoverable .

• VAT paid on the entertainment expenses such as accommodation, food and drinks provided to non employees not during a meeting and access to shows, events, trips provided for the purpose of pleasure or entertainment is not recoverable.

• Furthermore, the hotel stay which is paid to a new joiner before he/she finds his/ her own home is a recoverable expense whereas the lunch or dinner to employees is not a recoverable expense.

• No VAT is recoverable neither for service awards nor retirement gifts for staff parties. For example : Eid gifts, etc

CONCLUSION

This clarification would however discourage the pharmaceutical companies to invite their buyers to a conference in a hotel in order to deduct input VAT. It would also prevent a dealer holding a launch party for a new car model to recover input VAT on the food, drinks, band etc.This clarification has allowed to provide potential customers with gifts, although this constitutes deemed supplies for which VAT is due.