New era for input VAT credit – Do you know your suppliers?

Dubai: From January 1, 2026, the FTA can reject an 'input VAT credit' — the tax a business pays on business-related purchases and imports and uses to offset VAT collected from customers — if a transaction was part of a supply, or supply chain, linked to tax evasion and the taxpayer “should have been aware” of that link.

If a business fails to carry out the required supplier or transaction checks, it may be treated as having “should have been aware” of the tax evasion. The procedures for these checks have now been set out under FTA Decision No. 13 of 2026, effective October 1, 2026. This process is referred to here as “Know Your Supplier” (KYS).

KYS requires businesses to verify a supplier annually and check each supply transaction. Businesses must carry out and document these checks. They must also maintain an internal KYS policy and appoint an in-house compliance officer. KYS is not required below the specified thresholds of Dh100,000 and Dh10,000.

Many UAE businesses are struggling to understand how widely the KYS process applies.

Could the FTA reject an input VAT claim whenever KYS has not been completed? Fearing such an outcome, some UAE businesses have started conducting KYS checks on all their suppliers, including checks on every supply, simply to recover input VAT.

Requiring KYS for all suppliers could create a heavy administrative burden. Established suppliers such as banks, telecom companies, utility providers and licensing authorities could receive a flood of requests for company registration, identity and other verification documents. Visits by multiple customers to verify their business premises could disrupt their day-to-day operations.

A typical UAE business supplies goods or services to several other UAE businesses. It would not only have to collect information about its own suppliers but also respond to similar requests from each of its customers.

If KYS takes two hours per supplier, checking just 100 suppliers based on an eight-hour working day would take 25 days. Applied across the entire VAT-registered business base, the time and cost involved are likely to be significant.

UAE businesses may also face judgement calls during risk checks. These could involve comparing profit margins, assessing whether a supplier’s premises match the nature of its operations, and examining unusual differences in transaction volumes or values. Businesses may be unsure whether to continue dealing with a supplier when these questions have no clear answers.

Could an input VAT claim instead be rejected only when actual tax evasion is discovered and the taxpayer cannot produce KYS records to support the claim?

If so, UAE businesses could take a more practical approach. They could choose not to conduct KYS checks on well-established suppliers or give up input VAT claims involving small suppliers where verification is not practical.

If a supplier does not respond to KYS requests for a one-off transaction, the business could decide whether it still wants to proceed with the deal.

The burden of proof remains on the business. It must either produce documented KYS checks or risk losing its input VAT claim if tax evasion is later discovered within the supply chain.

The “should have known” principle in tax evasion cases is not new. The European Court of Justice established it more than 20 years ago in Axel Kittel v Belgian State (C-439/04), commonly known as the “Kittel principle”.

In the UK, authorities consider what a taxpayer knew and whether it ignored warning signs found during due diligence or risk checks. If a transaction appears “too good to be true”, the taxpayer should either avoid it or carry out a more detailed risk assessment.

Compared with some other tax jurisdictions, FTA Decision No. 13 of 2026 is helpful because it sets out a detailed process for checking suppliers and transactions.

Other measures have already been introduced to tackle potential tax evasion. The reverse-charge mechanism (RCM) applies to domestic business-to-business supplies of jewellery, metal scrap and electronic devices. The full introduction of e-invoicing by mid-2027 will help track supply information in real time.

Many businesses are now considering whether they must complete KYS checks on every supplier and every supply transaction before claiming input VAT. Further clarification on how the rules will operate would help the UAE business community plan and manage the KYS process.