Partial Exemption
When a business makes both taxable and exempt supplies, it must apportion input tax between the two categories.
Step 1: Direct Attribution
- Input tax directly attributable to taxable supplies: Fully recoverable.
- Input tax directly attributable to exempt supplies: Not recoverable.
Step 2: Residual Input Tax
Input tax that cannot be directly attributed (e.g., office rent for a building used for both taxable and exempt activities) must be apportioned.
Standard method: Use the ratio of taxable supplies to total supplies:
Recoverable residual = Residual input tax × (Taxable supplies ÷ Total supplies)
Worked Example
A business has:
- Standard-rated supplies: AED 800,000
- Exempt supplies: AED 200,000
- Total supplies: AED 1,000,000
- Direct input tax (taxable): AED 15,000 (fully recoverable)
- Direct input tax (exempt): AED 5,000 (not recoverable)
- Residual input tax: AED 10,000
Recovery rate = 800,000 ÷ 1,000,000 = 80% Recoverable residual = AED 10,000 × 80% = AED 8,000
Total input tax recovered = AED 15,000 + AED 8,000 = AED 23,000
Annual Adjustment
At year-end, the business must perform an annual adjustment to ensure the apportionment accurately reflects actual usage. This compares the provisional rate used during the year with the actual ratio at year-end.
Alternative Methods
The FTA may approve alternative apportionment methods if the standard method does not produce a fair and reasonable result. These require prior FTA approval.