Update to the Input Tax Apportionment Guide (VATGIT1)

The Federal Tax Authority has issued an updated Input Tax Apportionment Guide(VATGIT1), introducing key changes for businesses engaged in both taxable and exempt activities.

About SRP, its eligibility and practicality

1. What is a Specified Recovery Percentage (SRP)?

SRP is a new mechanism introduced under the amended UAE VAT Executive Regulations, effective 15 November 2024. It allows businesses making both taxable and exempt supplies to use a fixed recovery rate, based on the prior year’s actual recovery rate, for determining the input tax recovery rate in the following year.

2. Eligibility Criteria:
• VAT registration for at least 12 months.
• Applicants must have a mix of taxable supplies and exempt supplies.
• An authorized signatory, a Tax Agent, or a court-appointed representative must make applications. Tax consultants cannot apply on behalf of businesses unless they are legally appointed as Tax Agents.
3. How does SRP work in practice?
• The recovery percentage is locked based on the prior year’s actual recovery rate.
• Where the Business is subject to a special apportionment method, the SRP shall be determined based on the prior year’s recovery rate calculated under that method, even if FTA approval was not obtained for the use of such special method earlier.
• Businesses subject to the sectoral method will use a single recovery rate as the basis for their SRP calculation.
• If no special method applies, the standard apportionment method applies as a basis to determine SRP.
• Once approved, the SRP is valid for four years, and businesses are locked into the apportionment method for at least two years following approval.

Key Benefits and Considerations

1. Benefits for businesses:
• Stability & predictability: Simplifies forecasting and budgeting of recoverable VAT.
• Reduction in administrative burden: Reduces the administrative burden of calculating apportionment for each period.
• FTA certainty: Pre-approval from the FTA lowers the risk of disputes.
• Strategic advantage: Businesses with stable operations and consistent mixed supplies stand to benefit significantly.
2. Challenges & Considerations:
• Sectoral method users: For industries like banking, insurance, or real estate, where sectoral methods can apply, calculating and justifying a single SRP may be complex and require a robust analysis and evidence.
• Variance reporting obligation: If the actual recovery rate at year-end differs by more than 10%, businesses are obligated to notify the FTA within 20 business days.
• Fixed framework: Once locked in, businesses cannot change the method for at least two years.
• Applications to the FTA: Use of an SRP can only commence post receipt of FTA approval, which involves the preparation and submission of an application through the EmaraTax Portal.
• Timeframe: The FTA may take up to 40 days (non-sectoral method) and 60 business days (sectoral method) to review applications.

What this means for businesses:

The SRP mechanism can be valuable for businesses with stable and predictable operations, helping streamline compliance and reduce VAT uncertainty. However, it also increases the compliance responsibility, from proper monitoring of recovery rate variances to ensuring accurate and timely notifications to the FTA.

How Andersen can help:

The introduction of SRP brings new opportunities but also additional compliance responsibilities. At Andersen, we partner with businesses to ensure they can maximise the benefits while staying fully aligned with FTA requirements. We support our clients to:

• Evaluate suitability: Assess whether SRP is the right approach based on business model, supply mix, and long-term plans.
• Prepare strong applications: Prepare comprehensive, FTA-ready applications supported by detailed workings and robust documentation.
• Enhance compliance processes: Implement effective controls to track recovery rates, manage variance reporting, and maintain audit readiness.
• Provide ongoing advisory support: Offer continuous VAT guidance, including sector- specific insights for industries such as financial services, insurance, and real estate.

With our complex VAT expertise and sectoral experience, Andersen helps businesses simplify compliance, reduce risks, and unlock strategic advantages.

Download the full article for detailed guidance on SRP eligibility, application procedures, and compliance management.