Eid shoppers at a Lulu hypermarket in Abu Dhabi. Firms will not be able to recover VAT on costs related to Eid gifts and gifts for other festivals and special occasions for their employees. Image Credit: Abdul Rahman/Gulf News Archives

Dubai: Entertainment services supplied to employees, such as staff parties and retirement gifts, should not be exempt from Value Added Tax (VAT), the Federal Tax Authority (FTA) has said.

The authority noted in a statement posted on its website Monday that according to the federal law on VAT, the five per cent tax incurred on goods or services purchased to be given away to staff free of charge, in order to reward them for long service, should be blocked from recovery.

Examples of these gifts include long service awards, Eid gifts and gifts for other festivals and special occasions, or a dinner to reward service.

The clarification issued by the FTA is the latest in a number of statements regarding various technicalities surrounding the tax system.

In a recent press statement, the FTA clarified that entertainment services consist of “hospitality of any kind,” including the provision of accommodation, food and drinks which are not provided in a normal course of a meeting, access to shows or events, or trips provided for the purposes of pleasure or entertainment.

Meanwhile, the FTA added that for VAT registrants who are not designated government entities, input tax cannot be recovered if it is incurred providing entertainment services to customers, potential customers, officials, shareholders, or other owners or investors.

FTA Director-General Khalid Ali Al Bustani said in a statement that if a designated government entity provides entertainment services to anyone not employed by the entity, it will be able to recover the input tax incurred on those costs.

This exception pertains only to entertainment services provided to non-employees, including meetings with delegations from other countries where lunch or dinner is provided, meetings with representatives from other government entities to discuss official business, where refreshments are provided, or ceremonies held to mark significant political events.

However, all companies, including designated government entities, which provide entertainment services to its employees, are prevented from recovering any VAT included on such costs.

There are a handful of circumstances in which a taxable person is entitled to recover VAT on such costs, including where it is a legal obligation to provide those services or goods to those employees.

As for employee expenses, the authority outlined certain circumstances where a taxable person will fund or reimburse an employee for certain costs that the employee incurs for business purposes, in the course of performing his/her role. These include cases where an employee is on a domestic business trip and requires overnight accommodation, the VAT incurred on hotel costs, for example, would be recoverable.