Typically, VAT is charged on a taxable supply. As shared here, for a taxable supply to exist, a number of conditions have to be met.
Sometimes, an activity may take place which does not satisfy the requirements of a taxable supply. For example, a person may do something with the goods which does not involve making them available to another party, or goods or services may be provided to another person without any consideration.
To ensure that VAT rules are not circumvented by conducting activities in a manner which would not give rise to a taxable supply, the VAT legislation deems a supply to take place in certain situations. These are known as “deemed supplies”.
Where a deemed supply takes place, a taxable person may be required to account for VAT as though they have made a taxable supply of goods or services.
There are a number of situations that give rise to a deemed supply:
- Where a taxable person supplies goods or services which formed part of their assets for no consideration
- Where a taxable person transfers goods that form part of their business assets from the UAE to another GCC Implementing State, or from the taxable person’s business in another GCC Implementing State to the UAE, unless:
- the transfer is treated as a temporary transfer in accordance with the Customs legislation; or
- the transfer is made as part of another taxable supply of these goods
- Where a taxable person deducts input tax in respect of goods or services but then uses them for non-business purposes
- Where a person deregistered from VAT, there is a deemed supply of goods and services that the person owns at the date of deregistration
The above rules mean, for example, that gifts or the private use of business assets may give rise to a liability to account for VAT.
It should be noted that there are a number of exceptions that prevent the deemed supply rules from being triggered. For example, there will be no deemed supply in respect of any goods or services if no input tax was ever recovered in respect of those goods and services, or where the supply would be an exempt supply (e.g. a supply of a residential building). Furthermore, no deemed supply will exist where the value of the supply of goods (e.g. gifts) for each recipient does not exceed AED 500 within a 12-month period, or where the total of output tax which would be payable by a person on all deemed supplies made by them is less than AED 2,000 for a 12-month period.
Example:
A furniture distributor purchases a dining table with the intention of selling it on to a customer. The distributor is charged VAT on the purchase of the dining table, which they recover as input tax.
At a later date, the furniture distributor decides to give the dining table away to a staff member for free in recognition of good service from the member of staff. This is a deemed supply and the distributor is required to account for output tax on the deemed value of the supply and pay the output tax over to the FTA.