UAE VAT changes could make large cash payments more expensive for businesses

Dubai: UAE businesses that rely on large cash payments, provide accommodation to employees or recover VAT on staff benefits may need to review those arrangements before new VAT rules take effect on October 1.

The biggest immediate change concerns cash payments. Under the amended VAT Executive Regulations, businesses may lose the ability to recover input VAT on supplies above a prescribed value where payment is made, or intended to be made, in cash.

The Minister of Finance has yet to announce the amount that will trigger the restriction, so businesses do not yet know exactly where the cut-off will fall.

Cash-heavy businesses may need to rethink payments

The rule could be relevant to businesses where cash continues to move through different parts of the supply chain.

Justin Whitehouse, Managing Director and Global & Middle East Indirect Tax Leader at Alvarez & Marsal, said retail, food and beverage businesses, subcontractor payments, site petty cash and cash-on-delivery operations should identify where cash payments are being made and at what values.

“This is a standalone restriction, and it sits outside the existing ineligible categories of recoverable input tax,” Whitehouse said.

One unresolved issue is what happens when only part of a high-value transaction is settled in cash.

Whitehouse noted that the regulation refers to the value of “any supply” rather than simply the cash payment itself, meaning a partial cash settlement could potentially affect VAT recovery on the wider supply depending on how the provision is interpreted and applied.

Businesses will therefore need to wait for the Ministerial Decision setting the threshold and controls before the full impact becomes clear.

Staff housing comes under a new test

Companies that provide accommodation to large workforces also face changes to how they assess VAT recovery.

Construction, contracting, hospitality, manufacturing, facilities management, oil and gas and logistics are among the sectors likely to be most exposed because staff housing and labour accommodation form part of their operating costs.

Under the amended rules, employer-provided accommodation will not qualify for input tax recovery through the general labour law route unless the accommodation is specifically mandatory under decisions or directives issued by the Ministry of Human Resources and Emiratisation.

Whitehouse explained that the businesses in affected sectors should reassess their current treatment because many have traditionally recovered VAT on labour accommodation, staff housing and camp operating costs.

“The amended provision carves accommodation out of the general labor law route, and it qualifies only where MoHRE mandates it,” he said.

That does not mean every employee-related cost is treated in the same way.

Hasn said input tax recovery for non-housing staff benefits remains available for contractual obligations or documented company policies, provided they meet the cases and conditions prescribed by the Federal Tax Authority.

The position still needs further clarification because those cases and conditions have yet to be specified by the FTA.

Employment contracts and HR policies need another look

The practical effect for employers is that existing arrangements cannot simply be assumed to qualify under the new rules.

Businesses that currently recover VAT on accommodation, medical expenses or other employee benefits will need to check the basis on which that recovery is being claimed and whether their employment contracts and HR policies support it.

“Input tax recovery structures built on a general labor law obligation will need to be retested. Each cost should now be measured against MoHRE limits or directives,” Whitehouse said.

He added that the contractual obligation and documented policy exception remains for other employee costs, but its application will depend on cases and conditions still to be specified by the FTA.

Hasn explained that the HR and tax teams should also review whether workforce housing is backed by an explicit MoHRE mandate and whether employee benefit policies meet the requirements set out under the amended rules.

October 1 is the first deadline

Most of the new provisions take effect on October 1, 2026, giving businesses a limited period to review payment processes, employment policies and VAT recovery positions.

Whitehouse said companies should re-run their input tax analysis before that date instead of assuming their current treatment will continue, particularly because input tax recovery is an area routinely examined by the FTA.

Businesses should also begin identifying high-value supplier payments currently made in cash so they are ready to move those transactions to traceable payment channels once the government publishes the relevant threshold and controls.

Another VAT change arrives later

Businesses that make both taxable and exempt supplies will also face a change in how recoverable input tax is apportioned, although that provision follows a later timetable.

The revised methodology will apply from the first tax year commencing after October 1, 2027 and will principally use the value of supplies carrying input tax recovery compared with total supplies.

Government entities and charities will continue under a separate input-based methodology.

Whitehouse said companies affected by the change should model the new method against their existing approach ahead of the transition and calculate what it could mean for VAT recovery.

Businesses also need to review multi-component contracts under the amended single composite supply provisions before October 1, particularly where several goods or services are sold together.

The new rules leave businesses with several areas where further guidance will determine how the provisions work in practice, particularly the cash-payment threshold, the treatment of contractual employee benefits and the application of VAT to bundled supplies.