VAT recovery on CSR related initiatives might not be as straight forward as it seems. Image Credit: Shutterstock

While many countries are still struggling to get their citizens vaccinated against COVID-19, the UAE has done so with about 70 per cent of its population and witnessing an uptick in economic growth. The accelerated vaccination has placed UAE among the top in terms of vaccine distribution rates.

The success of this is largely attributed to the government’s collaborative approach with businesses in the region. As part of their corporate social responsibility (CSR) initiative, businesses too joined hands by organizing vaccination drives for employees and their families, ensuring adherence to regulations with sterilization of commercial space, regular PCR tests for employees, property improvements, and supporting infected staff by sponsoring hotel accommodation, all at the expense of the company.

The recovery of VAT charged on such CSR spends has remained a grey area, and businesses are unsure whether they should expense or treat it as a recoverable VAT. Generally, VAT incurred on indirect expenses, except entertainment-related, are recoverable as general overheads.

In the case where expenses are incurred for employee welfare free of any charge, input VAT is recoverable only when the following three conditions are satisfied: (i) it is a legal or commercial obligation or an HR-documented policy, (ii) it is necessary for employees to perform their role (iii) and it can be proven to be normal business practice in course of employing people.

Office makeovers

For most businesses improvements and renovations to their premises had to be made as a precautionary measure or in compliance with local regulations. These improvements included the installation of glass dividers between dining or working areas to maintain distancing, setting up a sanitation booth at the entrance, placement of contactless fixtures such as water stations or touch-free biometrics, as well as putting up stickers and signages all over the location.

Though no specific input VAT recovery rule is prescribed under the law, businesses may be able to argue that these should be considered general overhead expenses essential to carry out business operations and consequently, and thus recoverable for VAT purposes.

The pandemic has undeniably popularized the work-from-home concept. Many organisations have provided office furniture to their employees to set up an office desk at home. Input VAT recovery on such outlays may be recoverable only if the purchases are made and ownership of the items remain under the name of the company.

Ambiguities remain

Where such items are given to the employees for free, it could be treated either as a deemed supply, or recovery of input VAT could be prohibited unless businesses can demonstrate the three conditions discussed above.

In the recent workshop organized by the FTA for tax agents, office sterilization expenses and PCR tests conducted for employees were clarified to be treated as general overhead expenses for input VAT recovery. However, ambiguity remains on the cost incurred by businesses for arranging a vaccination drive for employees and their dependents.

Certain businesses, for example, restaurants, retail sector, or other businesses where employees cannot work remotely and must be on-site to do their jobs, can take a position that the cost of arranging vaccination drive for employees and their dependents is critical to ensure the safety of customers.

Input VAT recovery on the fixed-mobile post-paid plan provided to employees is another contemporaneous issue. Since mobile phones are inherently available for personal use by employees, demonstration of official usage for input VAT recovery is becoming a challenge for most businesses.

Many telecom companies have offered extra bandwidth to their employees free of charge during a pandemic for uninterrupted work. Clarification in this direction would be beneficial.

Claim on a hotel stay?

There are also cases where businesses have sponsored hotel accommodation for the infected staff for quarantine purposes. In general, input VAT recovery on hotel accommodation has been prohibited by the FTA in most cases, as it innately denotes entertainment and leisure.

Since the VAT Law does not cover such a scenario where accommodation is provided due to medical exigencies, input VAT recovery on such expenses remains a question. In a nutshell, different businesses resort to different practices depending on their specific circumstances.

Some businesses are recovering VAT on various CSR spends and opting for a liberal interpretation, while others take a conservative approach in expensing the VAT cost.