How to reclaim VAT on employee expenses?

Apr 05, 2024

VAT recovery and employee expenses

VAT recovery is a financially significant expense for any business. Reclaiming VAT can be done on different expense categories. There is one general thing common between all companies, which is employee expense management. Actually, every company has a legal obligation to reimburse all its employees for any professional expenses they incurred.

However, if the employees’ expenses are valid and important towards the company’s operation, it can be recovered as VAT on employee expenses. Still, this is not an automatic process and it can be applied to only some expense categories.

One thing to remember while the employer is recovering VAT on any employees’ expenses is that those expenses need to be professional. Not all employee expenses qualify for reimbursement.

What is VAT and how does it work?

VAT stands for Value Added Tax, which is levied on all goods and services sold in the UAE. Businesses can claim input tax for all business-regarding expenditures. However, of course, the business has to be VAT registered in order to do so. If a business wants to reclaim VAT, it has to keep a track of all purchases.

In receipts for everything, VAT is mentioned as a separate value to the cost of purchase. This means that the task of collecting VAT receipts and calculating VAT returns becomes easier. Once you reach the VAT tax threshold, you have to begin charging VAT. 

The rate of VAT in the UAE is 5 percent. It is supposed to provide the nation with a fresh source of income that is continuously used to facilitate avant-guard public services. A business must register for VAT, once its taxable supplies and imports cross AED 375,000 per annum.

For businesses with over AED 187,500 supplies per annum, VAT registration is optional. A business pays the government tax that is collected from its customers. On the other hand, the government refunds it on the tax it has paid to its suppliers. Outside boundaries businesses can also reclaim the VAT they incurred while visiting the UAE. 

Businesses that are registered for VAT, receive the amount in the name of the government and the consumers pay the tax as a 5 percent increase in the cost of the taxable good and services they buy from anywhere in the UAE. Tourists visiting UAE pay VAT during the point of sale.

What are employee expenses?

A common practice among all businesses is the employees making purchases and being reimbursed by the employer to cover the costs the employees incurred. All the employers are responsible to reimburse the VAT levied on the supplies made by the employees during the following situations: 

● Miles expenses like fuel, repair, and motor maintenance costs.

● Considerable expenses like when an employee pays for meals and drinks on a business trip or normal workplace meeting.

● Expenses related to the staff transfers and employee relocation.

● Purchase of miscellaneous office items like tools, basic supplies, etc.

Claiming VAT on employee expenses is only possible when you will successfully demonstrate that all the expenses incurred were legitimately business-related.

Problems with reclaiming VAT on employee expenses

1. VAT rules vary

Every country has different tax regulations. Along with this, every country has its own tax charges which are dependent on the type of the product. Due to these differences, companies that have their branches in different countries around the world have to face numerous challenges to be competent in the market. 

2. Missing the details

As proof of all the business expenses, receipts and invoices are the only sources to make claims. If any information goes missing in the invoices, your company can very well lose out on VAT reclaims. Hence, it becomes extremely crucial to properly document all receipts and invoices with all the country-specific details. 

3. Unseen costs in VAT recovery on employee expenses

Reclaiming VAT can be a very cumbersome and complex procedure. It also requires you to have immensely detailed knowledge about the technical and accounting aspects of VAT recovery. This can be a very taxing task and needs an extreme level of expertise. Ultimately, the whole procedure takes a colossal amount of time and energy.

Things you should know before reclaiming VAT on Employee Expenses

VAT on employee expenses can be recovered by companies that are registered in a VAT regulated country and also they have to ensure that all-important and required details are thoroughly documented and stored.

Possessing adequate information before making VAT claims can make the whole procedure easier and simpler. Here are a few things you should know before claiming VAT on employee expenses:

1. VAT charges at zero percent cannot be reclaimed in UAE such as export products and services outside the GCC Supplies (ships and aircraft), many investment-grade metals like gold and silver, certain health and medical care services, freshly constructed residential properties in UAE.

2. Ensure that the invoice is valid and legitimate

3. The purchase made should not be blocked for VAT reclaim in UAE

4. The purchase should be completely business-related 

5. Make sure that the receipt submission is done as per the national currency of the country

6. Pro forma invoices, delivery notes, supplier statements, and payment requests are invalid expense proofs.

How can Volopay help you with reclaiming VAT on employee expenses?

Need help in easing the VAT recovery process? We got you. Use Volopay to solve all your finance-related problems. With Volopay's AI-powered automated bill creator, you can use the specialized OCR technology to convert invoices to bills automatically with 100% accuracy. This can save you hours in time spent on manual entry work.

Along with this, using Volopay will help you set a proper process for employees and expense claims which will help ensure:

●  All receipts submitted for expense items clearly show the VAT content of any amount paid

●  The VAT rate applied to each item must be stated clearly

●  A clear definition of categories such as client entertainment, staff entertainment, food & beverage, subsistence

●  Uncomplicated understanding of the VAT reclaim rules, especially those that apply to client and staff entertainment. A business expense policy plus an automated expense management system can be a very effective way of providing guidance to your employees

Taking the financial importance of VAT recovery under consideration, having an optimized tool like Volopay for organizing everything and avoiding any oversight is the smart choice. We help companies sort and integrate their accounting rules into the software automatically.

Moreover, we also assist in managing expense reimbursements without any papers and complex spreadsheets, which can help with VAT recovery. We support various VAT rates around the world, for companies that operate in various different countries.

Want to process tax reclaims without spending hours doing paperwork?
Should my business register for VAT?

If your business’ annual turnover crosses AED 375,000, then yes you must register for VAT.

How do I add VAT to my invoice?

A very easy formula for VAT rate is, to multiply your price by 1.05 for a 5% VAT charge, 1.02 for 20%, and leave the price as it is for a 0% VAT charge.

What is VAT exemption?

VAT exemption can either be used for goods and services which are not subjected to VAT or for companies that cannot charge VAT.

Who should file monthly VAT returns in the UAE?

All registered businesses in the UAE must file online VAT returns once they reach a certain threshold.

What is the difference between Sales Tax and VAT?

The major difference between Sales Tax and Vat is in the application of tax commodity. VAT is the tax levied at the initial level of production and distribution at the time of any value addition. Whereas Sales tax is charged on the total product value when the sale is made.