Input and Output Tax in UAE: Calculation, Difference & Recovery

In the UAE, input VAT is the tax businesses pay on purchases, while output VAT is what they charge on sales. The difference between the two determines the net VAT liability, influencing compliance, refunds, and overall tax responsibility.

Key Takeaways

• Input VAT is recoverable on eligible business expenses supported by valid invoices.
• Output VAT must be charged on taxable sales (standard 5%) and remitted to the Federal Tax Authority.
• Net VAT liability = Output VAT – Input VAT, determining whether payment or refund applies.
• Input VAT recovery is limited; personal, entertainment, and exempt supply expenses cannot be claimed.
• Claims are rejected if invoices are missing, incorrect, or linked to non-business or exempt expenses.
• Compliance requires accurate records, timely VAT return filing, and adherence to evolving FTA regulations.

What is Input VAT and How Does it Work?

Input VAT, also called input tax, is the Value Added Tax charged on goods and services a business buys for commercial use. It is called "input" because it applies to purchases that form part of making or supplying goods and services.

How to Calculate Input VAT in the UAE?

A business incurs input VAT when it purchases taxable goods or services from suppliers. This tax is paid at the time of purchase but can be recovered by offsetting it against output VAT, provided valid invoices and supporting records are available. The system ensures businesses do not bear VAT permanently, since the tax ultimately falls on the end consumer.

Eligible Expenses for Input VAT Deduction

Only expenses linked to taxable supplies qualify for input VAT recovery, and they must be backed by proper tax invoices. Common examples include raw materials, utilities, and professional fees related to taxable activities. Some costs, such as entertainment or personal spending, are excluded from recovery under UAE VAT law.

What is Output VAT and How Does it Work?

Output VAT, or output tax, is the Value Added Tax charged by a registered business on goods or services it sells. This tax is collected from customers on taxable supplies and must be paid to the Federal Tax Authority (FTA). Businesses serve as intermediaries for the government by charging output VAT on sales.

Charging Output VAT on Sales

Registered businesses are required to apply the correct VAT rate on taxable supplies. In the UAE, the standard rate is 5%, unless a supply qualifies as exempt or zero-rated. Output VAT is added to the invoice value and collected from the buyer at the point of sale.

Remitting Output VAT to Tax Authorities

The VAT collected must be reported in VAT returns and paid within the prescribed timeline. Businesses must ensure accurate records and timely submission to comply with UAE VAT law. Late payment or incorrect reporting can result in penalties and legal consequences.

How to Calculate Output VAT in the UAE? 

Output VAT is calculated by applying the VAT rate to the value of taxable sales made in a given tax period.

Example:
If a business sells goods worth AED 10,000 at the 5% standard rate, the output VAT is AED 500. The customer pays AED 10,500 in total, with AED 500 remitted to the FTA as output VAT.

The formula is simple:

Output VAT = Value of taxable sales × VAT rate

This figure is then compared against input VAT to determine the final VAT payable or refundable in the return.

Difference Between Input VAT and Output VAT 

Input VAT vs output VAT determines the net tax position of a business, guiding whether tax is payable to the Federal Tax Authority (FTA) or refundable.

What is Net VAT Liability and How is it Calculated?

Net VAT liability is the final amount a business either owes to the Federal Tax Authority (FTA) or can reclaim as a refund. It is determined after offsetting input VAT against output VAT and shows the business’s net VAT position.

How is it calculated?

1. Calculate Output VAT: Total VAT collected from customers on taxable sales.
2. Calculate Input VAT: Total VAT paid to suppliers for eligible business purchases.
3. Subtract Input VAT from Output VAT:

• If Output VAT > Input VAT, then the balance is payable to the FTA.
• If Input VAT > Output VAT, then the difference is refundable.

Formula:

Net VAT Liability = Output VAT − Input VAT

Example:

• Output VAT collected = AED 5,000
• Input VAT paid = AED 3,000
• Net VAT Liability = 5,000 – 3,000 = AED 2,000 payable to FTA

If reversed (Input VAT = AED 5,000 and Output VAT = AED 3,000), the business would be entitled to a AED 2,000 refund.

Input Tax Recovery in the UAE

Input tax recovery allows businesses to claim back the VAT they have paid on purchases and expenses used for making taxable supplies. In simple terms, it ensures that VAT does not become a cost to businesses but is only borne by the final consumer. For example, if a company buys raw materials, the VAT paid on those purchases can be recovered, provided the conditions under UAE VAT law are met.

However, not all input VAT is recoverable. Expenses like personal use, entertainment, or non-business activities may be blocked from recovery. To ensure compliance, businesses must maintain proper records and file accurate VAT returns. You can explore detailed eligibility rules and conditions for Input Tax Recovery in the UAE to understand what can and cannot be claimed back.

Top Reasons for Input VAT Deduction Rejection in the UAE

Not every VAT claim made by a business is accepted. Tax authorities may reject input VAT deductions if the claim lacks proper documentation, involves ineligible expenses, or shows signs of non-compliance. Below are the most common reasons for rejection.

1. Lack of Valid Invoices: Input VAT claims must be supported with proper VAT invoices. If invoices are missing, incomplete, or do not meet legal requirements, the deduction may be denied.
2. Non-Business Expenses: VAT can only be reclaimed on purchases directly linked to taxable business activities. Claims made on personal or non-business expenses, such as entertainment, are not eligible.
3. Exempt Supplies: Businesses engaged mainly in exempt supplies cannot recover input VAT on their purchases, as these activities do not fall under taxable supplies.
4. Incorrect VAT Rate Application: If VAT is charged or applied at the wrong rate, it can create discrepancies that may lead to rejection of the input VAT claim.
5. Fraudulent or Inaccurate Claims: Any sign of fraud, inflated deductions, or mismatches between supplier and buyer records may cause the tax authority to reject the deduction outright.

Best Practices to Ensure VAT Compliance in the UAE

Staying compliant with VAT regulations is not just about avoiding penalties, it also builds financial transparency and trust. Here are some best practices businesses should follow to ensure smooth VAT compliance.

1. Maintain Accurate Records: Keep detailed records of all invoices, receipts, and VAT-related documents. This helps support claims during audits and prevents disputes.
2. Issue Proper VAT Invoices: Always issue invoices that meet UAE VAT requirements, including supplier TRN, clear descriptions, VAT rate, and total VAT charged.
3. File Returns on Time: Ensure VAT returns are filed within the deadlines set by the Federal Tax Authority (FTA) to avoid fines and late penalties.
4. Separate Business and Personal Expenses: Only business-related expenses are eligible for VAT recovery. Maintain clear segregation to avoid wrongful claims.
5. Stay Updated with VAT Regulations: VAT laws and guidelines may change. Regularly review FTA updates to ensure ongoing compliance with the latest rules.

Conclusion

VAT compliance in the UAE requires businesses to strike the right balance between accurately recording input and output VAT, calculating net VAT liability, and ensuring timely recovery where eligible. Understanding the difference between input and output VAT, maintaining valid documentation, and being aware of reasons for deduction rejection are all key to avoiding disputes with the tax authorities.