UAE Sets Strict Conditions for Recovering VAT on Six Types of Employee Expenses

The decision took effect on October 1 under Article 53(1)(c)(2) of the VAT Executive Regulation. It covers employee transport, food and beverages, work-related accommodation, temporary housing for new recruits, mobile phones and internet services, and parking fees. Companies can recover only the VAT in these costs, not the full cost. On a Dh105 service that includes Dh5 of VAT, the recoverable amount is the Dh5, provided every requirement is met, Gulf News explained.

For finance and HR teams, the practical effect is that many common staff perks will qualify only if they are restructured. Several of the categories fail if employees can take cash instead. KPMG said in a client note that each arrangement has to meet all the conditions for its category, and that a contractual obligation or documented policy alone no longer establishes eligibility.

Transport qualifies only when it is used for trips between home and work, visits to clients or other journeys tied directly to an employee's duties. It must not be used for personal benefit, and staff must not have the option of a cash allowance instead.

Food and drink qualify in narrower cases, such as when employees live in remote or isolated places with no suitable way to prepare meals and no nearby restaurants. The meals must be linked to the period of work or residence that the job requires, again with no cash alternative.

Work-related accommodation must be provided because of operational needs and must not form part of an employee's regular pay or benefits. The job must require the employee to live near the workplace, project site or client premises. The housing must be for the employee alone, not family members, and must be proportionate to the job and the employee's basic needs, without recreational extras. An exception applies where the work requires an employee to live permanently near the site. Separately, temporary housing for new hires qualifies for up to 30 days.

Mobile phones, calls, data packages and home internet qualify when they are needed for work, including remote working and contact outside office hours. Limited personal use is allowed. However, employers must keep a documented internal policy on permitted use and the consequences of misuse, run reasonable monitoring and keep records.

Parking qualifies when the company pays solely for business purposes, such as external visits and meetings. Employers need a written policy setting out when parking is reimbursed and how claims are approved, and must keep receipts showing the date, time, amount and VAT paid.

The decision does not cover ordinary daily meals, cash allowances for housing or transport, or services mainly for personal use, even when the employer pays for them, Gulf News noted. KPMG added that any salary deduction for a benefit makes it a taxable supply, which falls outside the decision. Benefits outside the six categories remain under the general input tax rules.

With the rules already in force, KPMG advised companies to review each benefit arrangement against the conditions for its category and to update their policies, processes and supporting documents. Businesses that have been reclaiming VAT on allowances employees can take as cash are the most exposed if the FTA audits those claims.