Understanding the UAE VAT Capital Asset Scheme: A Simple Guide
If you’re a business owner in the UAE, you’ve likely heard about VAT (Value Added Tax) and its various rules.
One of the more complex aspects of VAT is the **Capital Asset Scheme**. This scheme is designed to ensure
that businesses adjust their VAT recovery on large capital assets over time, based on how those assets are
used. In this blog, we’ll break down the Capital Asset Scheme in simple terms and provide practical examples
to help you understand how it works.
What is the Capital Asset Scheme?
The **Capital Asset Scheme** is a VAT adjustment mechanism that applies to large capital assets purchased by
businesses. It ensures that the VAT recovery on these assets is adjusted over several years, depending on
how the asset is used. This is important because the way an asset is used (for taxable or exempt purposes)
can change over time, and the scheme ensures that VAT recovery reflects this.
Key Points:
- **Capital Assets** are items like buildings, machinery, or equipment that cost **AED 5,000,000 or more**
(excluding VAT) and have a useful life of at least **10 years for buildings** or **5 years for other
assets**.
- The scheme requires businesses to adjust their VAT recovery over the asset’s useful life, based on its
actual use.
How Does the Capital Asset Scheme Work?
When a business buys a capital asset, it can usually recover the VAT paid on the purchase in the same VAT
period. However, if the asset is used for both taxable and exempt activities, the VAT recovery needs to be
adjusted over time. This is where the Capital Asset Scheme comes into play.
Step-by-Step Process:
1. **Initial VAT Recovery**: When the asset is purchased, the business can recover the VAT based on its initial use. For example, if the asset is used 50% for taxable activities, the business can recover 50% of the VAT.
2. **Annual Adjustments**: Over the asset’s useful life (10 years for buildings, 5 years for other assets), the business must review how the asset is used each year. If the usage changes (e.g., from 50% taxable to 40% taxable), the business must adjust the VAT recovery accordingly.
3. **Final Adjustment**: If the asset is sold or disposed of before the end of its useful life, the business must make a final adjustment based on the sale.
Why is the Capital Asset Scheme Important?
The Capital Asset Scheme ensures that VAT recovery is fair and accurate over the life of a capital asset. Without this scheme, businesses could over-recover VAT if the asset’s use changes over time. By adjusting the VAT recovery annually, the scheme ensures that businesses only recover VAT based on the actual use of the asset.
Key Takeaways:
1. **Capital Assets**: The scheme applies to assets costing **AED 5,000,000 or more** with a useful life of **5 or 10 years**.
2. **Annual Adjustments**: Businesses must adjust VAT recovery each year based on the asset’s actual use.
3. **Final Adjustment**: If the asset is sold or disposed of, a final VAT adjustment is required.
Conclusion:
The **Capital Asset Scheme** is an essential part of VAT compliance for businesses in the UAE that purchase large capital assets. By understanding how the scheme works and making the necessary adjustments, businesses can ensure they remain compliant with VAT regulations and avoid over- or under-recovering VAT. If you’re unsure how the Capital Asset Scheme applies to your business, it’s always a good idea to consult with a VAT expert or tax advisor. They can help you navigate the complexities of the scheme and ensure you’re making the correct adjustments. **Need help with VAT compliance?** Contact us today to speak with one of our VAT experts and ensure your business is on the right track!
