Reversal of Input VAT: When and Why It Happens

Introduction

Under the UAE VAT Law, businesses are entitled to claim Input VAT on expenses that are used for taxable supplies. However, in some situations, the Federal Tax Authority (FTA) requires businesses to reverse previously claimed Input VAT.

Here we explain the reasons, circumstances, and correct process for reversing Input VAT, helping you stay compliant and avoid penalties.

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✅ What Is Input VAT Reversal?

Input VAT reversal refers to the adjustment made when a business has already claimed VAT on purchases or expenses, but later it turns out those expenses do not qualify for recovery under the VAT law.

Instead of retaining the input VAT benefit, the business must reverse (i.e., pay back) the amount through its VAT return.

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📜 Legal Reference

• Federal Decree-Law No. 8 of 2017 (VAT Law)

• Executive Regulations (Cabinet Decision No. 52 of 2017)

• Specific mention in Article 55 & 56: Input Tax Adjustment

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📅 When Does Input VAT Reversal Apply?

Below are the most common scenarios that trigger reversal of Input VAT in the UAE:

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1. Change in Use from Taxable to Exempt Supplies

If you initially used goods/services for taxable business activity and later use them for exempt purposes (like residential rental, financial services), Input VAT must be reversed proportionally.

📌 Example: You buy a property intended for short-term (taxable) leasing but later lease it on a long-term exempt basis — Input VAT must be reversed.

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2. Failure to Pay Supplier Within 6 Months

According to Article 55, if you claim input VAT on a purchase but fail to pay the supplier within 6 months from the invoice date, you must reverse the VAT in your return for the period following the 6th month.

✅ You can reclaim it again once the payment is made.

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3. Non-Business Use or Private Consumption

Input VAT is only allowed on business-related expenses. If goods or services are later used for personal or non-taxable purposes, VAT must be reversed.

⚠️ Example: Office laptops given for personal use later by employees.

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4. Invalid or Incomplete Tax Invoices

If the invoice used to claim input VAT is found to be:

• Missing mandatory fields

• Not issued in the correct format

• Issued by a non-VAT registered supplier

The FTA may disallow the claim, requiring reversal and possible penalties.

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5. Cancelled or Returned Supplies

If you return goods or cancel services for which input VAT was claimed, you must reverse the VAT portion unless a credit note is issued by the supplier.

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6. Change in VAT Registration Status

If a company deregisters for VAT and still holds goods or services for which input VAT was claimed, it must assess whether reversal applies.

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🔄 How to Reverse Input VAT in the VAT Return

1. Go to Form 201 on the EmaraTax portal.

2. In Box 9 (Adjustments to Input VAT), enter the reversal amount as a negative value.

3. Include proper documentation and maintain audit trails.

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📂 Documents to Keep for FTA Audit

• Original purchase invoice

• Ledger showing payment status

• Adjustment journal entries

• Justification for reversal

• Correspondence with supplier (if applicable)

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⚠️ Penalties for Non-Compliance

Failing to reverse Input VAT where required may lead to:

• VAT reassessments

• Administrative penalties (AED 10,000+)

• Denial of Input Tax claims

• Reputational impact during FTA audit

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💡 Best Practices

• Reconcile supplier payments monthly to check for unpaid invoices.

• Periodically review use of assets for taxable vs exempt purposes.

• Train finance staff on VAT eligibility and reversals.

• Consult a VAT advisor if there is a change in business use.

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📞 Need Expert Help?

At Sheikh Anwar Accounting & Auditing LLC, we support UAE businesses with:

• Input VAT reviews

• Reversal adjustments

• VAT return filing

• Audit preparation and FTA dispute resolution

📧 info@sa-auditors.com

🌐 www.sa-auditors.com