- ♦ VAT is chargeable on goods and services supplied by charities in the U.A.E
- ♦ The charity will be able to recover VAT on costs which directly relate to onward activities which are liable to VAT, subject to the normal VAT recovery rules applicable to all businesses
DONATED GOODS & SERVICES :
- ♦ When the donated goods & services are used by the charities as part of their onward provision of charitable activities and a charge is made, then VAT needs to be charged
- ♦ Since the relevant goods or services would be received by a charity free of charge, there will be no VAT on costs to recover
NON BUSINESS ACTIVITIES :
- ♦ Where an activity is performed by a charity that is acting in its charitable capacity and it makes no charge for the supply of goods or services concerned, the activity would ordinarily not be treated as being liable to U.A.E VAT as there is no charge, unless the supply is treated as a deemed supply
- ♦ No VAT on direct costs relating to such free provision of goods and services by the charity would be recoverable in such circumstances.
DEEMED SUPPLIES :
1.Where there is a supply of goods or services for which input tax was recovered but the goods or services were used, in part or whole, for purposes other than Business
- ♦ Where there is a supply of goods or services for no consideration, where those goods or services formed whole or part of assets of a taxable person, but are no longer considered to be as such
1.It will not be a deemed supply for VAT purposes if the relevant goods and services remain part of the assets of the charity
e.g. Property made available for free for events or kitchen appliances used in providing free meals
2.If the charity claims VAT in respect of acquisition of goods, and then gives them away for free outright, the supply will be treated as a deemed supply for VAT purposes.
e.g. Charity has purchased food and then donated it to poor, the charity should account for the output tax on the deemed supply of the food
3.Deemed supply rules only apply when input tax has been recovered in respect of the relevant goods or services
4. The total VAT due for all of the deemed supplies made by a charity for any 12-month period is less than AED 2,000, those supplies will not be subject to the deemed supply provisions in any case
DESIGNATED CHARITIES :
The following four conditions should be fulfilled for it to be treated as a Designated Charity undertaking relevant charitable activities and therefore eligible for the special VAT refund scheme :
♦ Approved by the Ministry of Community Development to carry out a charitable activity in the U.A.E, or established as a charity under Federal or Emirate Decree, or otherwise licensed to operate as a charity by an agency of the Federal or Emirate Governments authorized to grant such licenses, with its objectives including for instance, advancing health, education, public welfare, religion, culture, science, and similar activities;
♦ Operated within the terms of any approval, license or other authorization which has been granted by the aforementioned bodies in respect of its charitable activities;
♦ Operated on a not-for-profit basis;
♦ Funded primarily by means of grants or donations
♦ The Cabinet Decision only applies to the entity named and any trading subsidiary set up by a charity will not be included.
♦ Designated Charities need to apply and register for VAT
♦ The Designated Charities will have to charge VAT on all taxable supplies they make
VAT REGISTRATION OF CHARITIES :
♦ Any charity carrying on a business activity in the U.A.E and making taxable supplies in excess of the mandatory VAT registration threshold must apply to be registered for VAT purposes
♦ Any charity carrying on a business activity and making taxable supplies or incurring expenses subject to VAT in excess of the voluntary VAT registration threshold may apply to register for VAT purposes.
♦ Designated Charities need to apply and register for VAT in order to benefit from recovery of input tax, disregarding whether they meet the threshold or not
♦ Charities may register with other entities as a tax group
♦ However, a Designated Charity may only form or join a tax group comprising other Designated Charities
VAT TREATMENT OF SALES OR LEASES OF NEW BUILDINGS TO CHARITIES :
The first supply of a new building or part of a building will be subject to VAT at the zero rate where the following conditions are met:
♦ The charity is a Designated Charity;
♦ It must be the first supply of that building. Subsequent supplies are taxable at the standard rate (if it is not residential);
♦ The building, or part thereof, must be specifically designed to be used by the charity solely for its relevant charitable purpose
E.g. It cannot simply be an office building built speculatively that a charity then chose to occupy
♦ “Relevant charitable activity” means:
♦ An activity other than for the purpose of profit or benefit to any proprietor, member, or shareholder of the Charity; and
♦ It is undertaken by the Charity in the course or furtherance of its charitable purpose or objectives to carry out a charitable activity in the U.A.E as approved by the Ministry of Community Development, or under the conditions of its establishment as a charity under Federal or Emirate Decree, or as otherwise licensed to operate as a charity by an agency of the Federal or Emirate Governments authorized to grant such licenses
♦ Where the conditions for zero-rating outlined above are not met, the first supply of a new building or part thereof will be liable to VAT at the standard rate unless it qualifies as a residential building, in which case the special rules applicable to residential buildings may apply
♦ Subsequent supplies of buildings or parts thereof to be used for relevant charitable purposes will also be subject to their normal VAT rate.
VAT RECOVERY RULES FOR CHARITIES :
1.Which are not Designated Charities
♦ Subject to the normal VAT recovery rules
♦ VAT is generally only recoverable where it relates to taxable supplies
♦ Where a charity incurs VAT which relates to exempt supplies this VAT is also not recoverable
♦ Charities will therefore be required to allocate and apportion VAT recovery between taxable activities (recoverable) and non-taxable activities / exempt activities (non-recoverable)
2.Which are Designated Charities
♦ A Designated Charity may recover VAT on any expenses incurred by it as long as the expenses do not relate to exempt supplies made by the charity and are not the type of expenses for which input tax deductions are “blocked”.
♦ It may recover VAT on expenses even if those expenses do not specifically relate to supplies that typically allow VAT recovery
♦ However, where the Designated Charity carries on activities which allow for VAT recovery and also exempt activities, it may need to apportion VAT incurred between those activities so as to accurately determine the amount for which it is entitled to reclaim.