The Federal Tax Authority (FTA) has published a guide on Input Tax Apportionment (VATGIT1). The guide provides further clarity on the mechanism for recovering Input Tax where taxable persons make both taxable and exempt supplies.

The document covers the change introduced in the Executive Regulations - the Specified Recovery Percentage (SRP). This is an Input Tax recovery rate based on the registrant’s recovery percentage from the previous Tax year.

How Does The SRP Work?

SRP allows a taxable person to apply a fixed recovery percentage - calculated based on the preceding Tax year - to all Tax Periods of the subsequent year, rather than recalculating an apportionment rate in each Tax Period.

The SRP is determined as follows:

• Businesses with an FTA-approved special apportionment method: SRP is based on the recovery rate from the preceding year, calculated using that special method.
• Businesses eligible for a special method but without FTA approval: The SRP application should be based on the relevant special method.
• Businesses where no special method applies: SRP is based on the preceding year’s recovery rate using the standard apportionment method.

Where a sectoral special method is applied, the SRP must be a single recovery rate applicable to the entire taxable person.

Validity Period

An FTA approval for the SRP is valid for four (4) years, with a minimum two (2) year lock-in period before a change of method can be requested.

Reapplication

Applicants requesting an SRP must submit the annual adjustment calculations for the preceding Tax year and the proposed SRP for the next Tax year. The application should also include a comparison of recovery rates and sectors (if applicable) between the original and new calculations, with explanations for any significant fluctuations.

Process Related Changes (SRP and other special methods)

Application process and timelines

• The FTA may take up to 40 business days to respond to an initial application using a non-sectoral method, and up to 60 business days if a sectoral method is selected.
• If the FTA requests additional information, the registrant must respond within 40 business days. Failure to respond within this timeframe may result in the application being automatically closed in EmaraTax.
• Once the additional information is provided, the FTA may require a further 40 or 60 business days (depending on the method selected) to respond.
• If a registrant starts an application for a special Input Tax apportionment method or the SRP via EmaraTax but does not complete it, the FTA will send an automated reminder after 20 business days. The application must be finalised and submitted within 40 business days, otherwise the request may be automatically closed. (newly added)

Notifications Relating To Change in Business

The guide previously covered the requirement for registrants to notify the FTA within 20 business days if the recovery rate under an approved special method differs by more than 10% (for the full year) from the rate originally submitted, even though changes to an approved method are generally restricted for the first 2 years.

The updated guide provides the documentation that must be included in the registrant’s notification, namely:

• Confirmation of the variance and the date it was identified.
• Explanation of the reasons for the variance.
• Confirmation of any changes in the registrant’s business or operations.
• Details of the nature of these changes (if any).
• Full-year calculations used to identify the variance, including an annual wash-up calculation in Excel format.

Once submitted, the FTA will review the notification and supporting documents to determine whether the approved method remains appropriate. If the method is no longer suitable, the registrant may be required to submit a new Input Tax apportionment application.

Special Cases for Tax Year-End

The guide also includes a section to cover the special cases for Tax year-end. Registrants must determine their Tax year-end based on their assigned stagger. However, there may be special cases where the Tax year-end may differ, as follows:

• Deregistration – the last day on which the registrant is a Taxable Person.
• Joining a Tax Group – the day before the effective date of joining.
• Leaving a Tax Group – the day before the effective date of leaving.

Other Updates

The guide also provides worked examples of input tax apportionment calculations and a checklist of common errors, which businesses can use to avoid submitting incomplete or incorrect applications.

Please find the full guide for further details.