It goes without saying that there are multi-fold challenges involved in determining the VAT liability for recharges. The term ‘recharge’, often referred to as ‘recovery of cost’ generally does not have a legal definition but has come to acquire a significant importance from the viewpoint of VAT determination, simply because it is not clear whether a recharge in itself has to do anything with any supply of goods or services attracting VAT.

Challenges in determining VAT liability for recharge:

  1. It needs to be determined whether the cost recharged were incurred for the customer’s benefit or it was consumed by the last supplier, which eventually gets recharged to the customer.
  2. The second thing to be determined whether the recharge in itself is an independent supply or ancillary to the mains supply. It is equally important to analyse whether the person is recovering the payment made on behalf of another or recovering the expenses incurred as principal.

Disbursement and reimbursement of expenses for UAE VAT:

Recharges do not fall under the purview of VAT, which implies that the supplier will not derive any direct benefit. The UAE VAT legislation has not made any statement regarding the VAT treatment of disbursement and reimbursements, though a recent public clarification issued by the Federal tax Authority elaborating the tax treatment along with conditions to treat a transaction as disbursements. In UAE, taxpayers should ensure that all the legal contracts and related documentation are furnished adequately

Delving deeper into standalone recharges and ancillary recharges for VAT in UAE

Given a situation wherein the recharge constitutes the supply by entity B to entity C, this recharge from B to C is considered to be an independent supply which is subject to VAT. To make things clearer, let’s say, if an entity books an air ticket on behalf of another group entity and recharges cost, 5% VAT and 0% ancillary is charged.

Companies selling land to developers sometimes recover land-related charges, which typically comprise fees that are incurred to allow the developer permission to build extra floor space as compared to the permitted limit. Such costs are borne by the landowner, who pays it to the Dubai Land Department. The charges are later recharged to the developer or charged as separate.

Recovery of costs should have appropriate records:

The relationship shared by the supplier and the recipient also has an impact on how VAT is to be applied on recharges. To elaborate further, a recharge by a head office to its branch is beyond the scope VAT recovery since the head office and the branch represent a single person. Hence, any transaction between these two is regarded as an internal transition. A transaction qualifies as a disbursement only if the cost of the invoice is in the customer’s name on whose behalf the payment is made by the taxable person to the supplier.

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