The Capital Assets Scheme: Reclaiming VAT on Large Purchases
For any business, recovering the Value Added Tax (VAT) paid on expenses is a fundamental part of the tax system. For standard purchases, the process is straightforward: you reclaim the input VAT in the same tax period. However, when a business makes a substantial, long-term investment—like purchasing a building or a major piece of machinery—the situation becomes more complex. What happens if the way you use that asset changes over its long economic life?
This is the exact problem the **Capital Assets Scheme** is designed to solve. It is a special mechanism within the UAE VAT law that allows for a fair and accurate adjustment of input tax recovery on large capital purchases over time. It ensures that the amount of VAT reclaimed accurately reflects the asset’s use for making taxable supplies throughout its useful life. For businesses in the UAE making significant capital investments, understanding this scheme is not just a matter of compliance; it’s essential for managing cash flow and ensuring you don’t over- or under-claim VAT.
This guide will break down the UAE’s Capital Assets Scheme, explaining what it is, which assets it applies to, and how the adjustment mechanism works. As expert VAT consultants, we will provide the clarity needed to navigate this advanced area of tax law.
Key Takeaways
- Purpose of the Scheme: To adjust the initial VAT reclaimed on a large capital asset to reflect its actual use for taxable vs. exempt activities over its economic life.
- Asset Threshold: The scheme applies to capital assets with a value of **AED 5,000,000 or more** (excluding VAT).
- Adjustment Periods: The VAT recovery is monitored and adjusted over a specific period: **10 years** for buildings and real estate, and **5 years** for all other capital assets (like machinery or IT systems).
- Initial Recovery: You initially reclaim VAT based on the *intended* use of the asset in the first year.
- Annual Adjustments: At the end of each subsequent year, you compare the *actual* use to the initial intended use and make an adjustment on your VAT return, either paying back or reclaiming a portion of the VAT.
Why is a Special Scheme Needed for Capital Assets?
Imagine a business buys a new building for AED 10 million + 5% VAT (AED 500,000). At the time of purchase, it intends to use 100% of the building for its standard-rated trading activities. It would therefore reclaim the full AED 500,000 of input VAT in its next VAT return.
Two years later, the business decides to start a new, exempt financial services division and allocates 40% of the building to this new activity. Without the Capital Assets Scheme, the business would have received a full VAT refund for an asset that is now partially used for exempt activities (for which input VAT is not recoverable). This would be unfair to the tax authority.
The scheme provides a mechanism to “true-up” the initial VAT recovery over the asset’s life, ensuring fairness for both the taxpayer and the government.
How the Capital Assets Scheme Works
The process follows a clear, logical sequence of initial recovery followed by annual adjustments.
1. Identifying a Capital Asset
The first step is to identify if an asset falls under the scheme. The criteria are:
- It must be a single item of expenditure.
- The value must be **AED 5,000,000 or more**, excluding VAT.
- It must be intended for long-term use in the business.
2. The Initial VAT Recovery
When you purchase the asset, you make your first input tax recovery based on how you intend to use the asset during the first year. If you intend to use it 80% for making taxable supplies and 20% for exempt supplies, you would reclaim 80% of the VAT paid.
3. The Annual Adjustment Calculation
For each year within the adjustment period (5 or 10 years), you must perform a review. The adjustment is calculated using the following formula:
Adjustment = (Total VAT on Asset / Adjustment Period) x (Actual Taxable Use % for the Year – Initial Recovery %)
A positive result means you can reclaim more VAT. A negative result means you must pay back VAT to the FTA.
Example Walkthrough
Let’s use our building example:
- Asset: Office Building
- Cost: AED 10,000,000
- VAT Paid: AED 500,000
- Adjustment Period: 10 years
- Intended Use (Year 1): 80% for taxable supplies.
Initial Recovery: 80% of AED 500,000 = **AED 400,000**. The business reclaims this amount.
At the end of Year 2, the business reviews its operations and finds that the actual use of the building for taxable supplies during that year was only **60%**.
Adjustment Calculation for Year 2:
- (AED 500,000 / 10 years) x (60% Actual Use – 80% Initial Use)
- AED 50,000 x (-20%) = **-AED 10,000**
The result is negative. This means the business must make a **negative adjustment of AED 10,000** on its next VAT return, effectively paying back that amount to the FTA.
Expert Guidance on Capital Assets with EAS
The Capital Assets Scheme involves long-term tracking and complex calculations. Getting it wrong can lead to incorrect filings and potential penalties. Excellence Accounting Services (EAS) provides the expert oversight needed to manage these obligations correctly.
- VAT Advisory for Capital Purchases: Before you make a large investment, our VAT consultants can advise on the initial VAT recovery and the long-term implications of the Capital Assets Scheme.
- Compliance and Record-Keeping: We help you set up the necessary processes and bookkeeping systems to track the usage of your capital assets accurately over the entire adjustment period.
- Annual Adjustment Calculations: Our team can handle the annual review and calculation of your capital asset adjustments, ensuring they are correctly reported on your VAT returns.
- Strategic CFO Services: We provide high-level financial planning to help you understand the cash flow and profitability impact of major capital investments, fully considering the tax implications.
Frequently Asked Questions (FAQs)
The scheme applies to a single capital expenditure of AED 5,000,000 or more, excluding VAT. It does not apply to a collection of smaller assets that add up to this amount.
If you sell a capital asset while it is still being monitored under the scheme, you may need to make a final adjustment. The treatment depends on whether the sale itself is taxable or exempt. You must calculate the adjustment for the final period of ownership and include it in your VAT return.
Yes. The definition of “capital assets” is not limited to physical goods. A major software system or license with a value of AED 5 million or more and a useful life of several years would fall under the scheme with a 5-year adjustment period.
This would trigger a significant negative adjustment. Using the building example, if use changed from 100% taxable to 0% taxable, the annual adjustment would be: (500,000 / 10) x (0% – 100%) = -AED 50,000. You would have to pay back AED 50,000 to the FTA for that year, and for every subsequent year it is used for exempt purposes.
The calculated adjustment amount (either positive or negative) is entered into a specific box on your VAT return form (VAT 201) designated for capital asset scheme adjustments.
No. The Capital Assets Scheme only applies to capital assets acquired on or after the implementation of VAT in the UAE.
If you discover you made an error in your initial calculation, you should submit a voluntary disclosure to the FTA to correct the error and pay any outstanding tax or claim any under-claimed VAT. This is preferable to waiting for the FTA to discover the error during an audit.
It applies to a single item of capital expenditure. This could be a single asset purchased on one invoice, or it could be costs incurred over time that are capitalized into a single asset (like the construction of a building). The key is that it all relates to one distinct capital asset.
Yes. The costs incurred to construct the building would be capitalized. Once the building is completed and put into use, if the total capitalized cost is AED 5 million or more, it falls under the scheme. The adjustment period begins when the asset is first used.
You must maintain detailed records for at least 5 years after the end of the adjustment period. This includes purchase invoices, evidence of the initial intended use calculation, and annual records demonstrating the actual use of the asset (e.g., floor space allocation records, usage logs).
Conclusion: Long-Term Assets, Long-Term Responsibility
The Capital Assets Scheme is a fair but complex piece of the UAE VAT landscape. It reflects the reality that the use of major assets can change over time. For businesses making these significant investments, it introduces a long-term compliance responsibility that requires diligent tracking and accurate calculations. By understanding the mechanics of the scheme and maintaining meticulous records, you can ensure you remain compliant and that your VAT recovery accurately reflects the true economic use of your most valuable assets.
Planning a Major Purchase? Understand the VAT Implications.
Partner with Excellence Accounting Services to ensure your VAT strategy for large capital expenditures is sound, compliant, and optimized for your business.
