The UAE Federal Tax Authority (FTA) has recently issued guidance addressing certain value added tax (VAT) matters. These are summarized as follows:

Compensation Type Payments

This guidance clarifies the treatment of compensation-type payments, including that where a payment is not consideration for a supply, no VAT is due. Some of the main points include:

• A contractual payment to compensate for losses (liquidated damages), such as pre-agreed payments for damages due to termination of a contract or late performance, are not to provide consideration for a provision of any goods or services but to compensate a party for loss of earnings, and as such, the payments are outside the scope of VAT;
• The above does not include a hotel booking cancelation charge, which is considered a cessation of a right and a supply of services and hence subject to VAT;
• The VAT treatment of a payment to settle a dispute depends on the reason for the payment:
  • Where a payment is to enforce a contractual term, the payment is consideration for the contractual supply to which it relates and therefore subject to VAT;
  • Where a payment is in the nature of damages or compensation for any loss suffered by a party, the payment is not consideration for any supply and is outside the scope of VAT; and
  • Where a payment is in return for granting a right then the payment is consideration for the supply of the right and subject to VAT;
• A fine or penalty charge imposed for contravening terms of an agreement or performing an unlawful act is not consideration for any supply and is therefore outside the scope of VAT;
• The VAT treatment of a payment for damaged goods depends on the reason for the payment:
  • Where the payment is compensation and for breaching pre-existing terms of a contract, it is unlikely to be consideration for a supply and therefore would be outside the scope of VAT; and
  • Where a customer breaks a good and is obliged to take title to it, the payment the customer makes would represent consideration for a supply of goods, and so would be subject to VAT.

Profit Margin Scheme – Eligible Goods

This guidance covers goods that are eligible for the profit margin scheme, which allows sellers of second-hand (used) goods to account for VAT only on the profit made on the supply. The guidance provides that eligible goods may only be subject to the profit margin scheme if they have been previously subject to VAT before the supply in question. As a result, stock on hand of used goods which were acquired before the UAE's VAT regime entered into force (1 January 2018), or which have not previously been subject to VAT for other reasons, are not eligible to be sold under the profit margin scheme.

Labor Accommodation: Residential versus Serviced

This guidance covers the VAT treatment of the supply of labor accommodation, which will depend on whether the supply is considered a supply of residential property or a supply of serviced accommodation.

In general, labor accommodation is considered a supply of residential property, and exempt from VAT, where the building or lodging is the principal place of residence of the employee, is fixed to the ground and cannot be removed with damage, has been lawfully constructed or converted, and is not similar to a hotel, motel, BnB, or serviced apartment where services in addition to accommodation are provided.

Where additional services are provided that are incidental to the main supply of accommodation and not provided for an additional fee, they should not normally cause the supply to become one of serviced accommodation. Such services may include maintenance, garbage collection, security, etc. Services that are not considered incidental and that may result in a supply of accommodation being considered a supply of serviced accommodation, and subject to VAT, include telephone and internet access, cleaning of rooms other than the communal area of the property, laundry services, catering, and maintenance other than for general upkeep.

Taxable Person Guide for VAT (Issue 2)

In addition to the guidance above, the FTA has also issued the second edition of the Taxable Person Guide for VAT. The guide is the main reference guide to VAT in the UAE and provides:

• An overview of the main VAT rules and procedures in the UAE and how to comply with them;
• Assistance with the more likely questions that businesses might have; and
• References to more specialized publications where they have been published.

The guide is not legally binding, but is intended to provide assistance in understanding and applying the UAE VAT legislation.