VAT: Deemed supplies and its exceptions

Usually, deemed supplies occur when VAT registered persons are buying goods and services, and claiming input tax on these goods and services, but these goods and services are not being used for business purposes, or these goods and services are being supplied without any consideration. Deemed supplies also occur when taxable persons own goods and services at the time of de-registration.

The major reason for considering such supplies as deemed supplies is due to the fact that the taxable persons are claiming input tax but they are not paying any output tax on such goods or services since they are using such goods and services for non-business purposes or they are supplying such goods or services without any consideration which is leading to cost to the Federal Tax Authority (FTA).

For example, A car dealer bought a car in the name of the business and claimed full input tax (usually, businesses cannot claim input tax on cars as these are mostly available for personal use and can carry less than ten people, but car dealer can claim full input tax on such car since this is the inventory of car dealer), but they have given this car to one of the family members or any friend free of cost. This means, the car was bought for business purposes, input tax was claimed but related output tax was not paid to the FTA so the FTA will treat such supply as deemed supply.

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Article 11 of the UAE VAT Law describes that following will fall under the deemed supplies:

• Goods or services which were part of the assets of the business and supplied without any consideration. Due to this fact, it will no longer remain part of the asset of the business. Like in the above example, if the car dealer is giving the car free of cost to anyone, it will be considered deemed supplies.

• If the goods are being transferred from one implementing state to any other implementing state like from UAE to Oman (by the way, since all GCC countries have not implemented VAT, so the provisions of the Law and Regulations related to the implementing state are not effective till now) or taxable person is transferring the goods to its own business in other implementing state. Like in the above example, if the car dealer is transferring the car from UAE to its own showroom in Oman. However, if this is a temporary transfer or made part of another taxable supply, then it will not be considered deemed supply.

• Goods or services for which input tax was claimed but these goods or services were not used for business purposes. If these goods or services were partially used for non-business purposes, then to the extent, these were used for non-business purposes, it will be considered deemed supply. For example, if a manager of a rent a car company is using the car out of the fleet for personal purposes, then personal use by the manager will be considered deemed supply.

• Goods or services that a taxable person owns at the time of deregistration will be considered deemed supply as well. Like, a car dealer has few cars at the time of deregistration.

Article 12 of the Law and Article 5 of the UAE VAT Regulations, deal with the exceptions of deemed supplies. The summary of these exceptions is that if there is no cost to the FTA or the cost is up to the allowed limit, then it will not be considered deemed supply. The supply of goods or services as mentioned in the above points will not be considered a deemed supply if the:

• Input tax was not recovered on such supplies

• Supply was exempt by nature

• Input tax was adjusted under the Capital Asset Scheme

• Value of samples or commercial gifts supplied to a single recipient in the proceedings 12 months period is not exceeding more than Dh500.

• Value of deemed supplies in the preceding 12 months period is not more than AED 40,000 (Output tax 2,000/5%) at the company level.

In the first three exceptions, we can conclude that there is no cost to the FTA, and in the next two exceptions, we can observe that FTA has set up the limit for free supplies. For a person, the limit of supply is Dh500 in the preceding 12 months and at the company level limit is Dh40,000 in the same period. Once the limit is being crossed, VAT would be applicable on the full amount or the incremental amount, Law is not very clear regarding this but I believe, it would be applicable on the incremental amount as the exceptions have been defined in the Regulations.

In the light of the above article, it’s very important for the taxable persons to properly analyse their supplies, and wherever the concept of deemed supplies is applicable, it should be applied accordingly to avoid penalties from FTA.