While VAT is far from a new concept to most business owners in the UAE, our experience as an accounting firm has shown that many businesses still don’t understand fully how it works. From input tax recovery errors to false classification of supplies, these mistakes cost money, time, and (in worse scenarios) come with compliance risks and penalties from the FTA. Because of how common these misunderstandings have been over the years, we’ve decided to compile a list of the most common misconceptions about UAE VAT that we’ve seen.
Note: If you would like to do your due diligence, we strongly recommend you look over the FTA’s website to check your own company’s compliance. (More on this later!)
“If I pay VAT, I can Always Claim It Back”
We’ve seen this one a lot. Many businesses overspend with the expectation that they can get that money back so long as they were “on the clock” or the expense was vaguely related to the business’ operations that day. The important thing is this:
- Input VAT recovery is conditional under UAE VAT Law and its Executive Regulations.
- The expense being claimed must be incurred for the purpose of making taxable supplies.
- Even if the claim is valid, you still need a proper tax invoice.
It’s also important to remember that blocked expenses cannot be recovered. This includes but is not limited to: employee entertainment, client hospitality, and staff leisure, even if related payments were made during business hours. As usual, we recommend that you speak to an expert if you are ever unsure.
“VAT on Food and Drink Is Always Recoverable”
This is also an incredibly common misunderstanding we’ve seen when reviewing a company’s VAT position. Here’s the bottom line: VAT is generally not recoverable on employee entertainment, staff meals (unless contractually required) or client hospitality. Under UAE VAT Law and its Executive Regulations, input VAT on entertainment is specifically restricted, including food/drinks provided to employees, customers, suppliers, or other business contacts.
The important thing here is that even if the expense is connected to business activity, entertainment costs are not viewed as being incurred for the purpose of making taxable supplies, and so VAT recovery is typically blocked.
“Transport Expenses are always claimable”
For some businesses, this assumption may be accurate – but it depends on how how the vehicle is used. What matters here is an important distinction: Business transport is distinct from personal use.
For example, an I.T. company offering on-site services that has to travel to a client’s location is making a business transport expense, which can be recovered on the VAT return.
On the other hand, an employee taking the company car to a nearby fast-food restaurant on their lunch break is making a personal use expense, which cannot be recovered.
The difference here is whether the vehicle has been made available for personal use. This classification matters a lot, but a good general rule of thumb is that entertainment-related travel (which, again, includes food/drink) is almost always restricted and cannot be claimed on your VAT return.
“Zero-Rated and Exempt Supplies are the same”
This one is absolutely crucial, and it’s very easy to get wrong: Zero-rated and exempt supplies are not interchangeable, and confusing the two can affect whether you are entitled to recover input VAT.
A zero-rated supply is subject to VAT at 0%. VAT is still considered to be “charged”, just at a rate of 0%, and businesses can generally recover input VAT incurred in making those supplies.
An exempt supply, on the other hand, is not subject to VAT at all. While no VAT is charged to the customer, input VAT related to making it is typically not recoverable.
For example, certain exports may qualify as zero-rated, but residential rental income is generally treated as exempt. The former can be recoverable, the latter cannot.
“If I don’t meet the UAE VAT Threshold, i have no VAT obligations”
We’ll keep this short and sweet. Check the FTA’s website to determine your business’ official obligations – or contact an expert. Even if your business hasn’t hit the mandatory registration threshold for VAT, you still have responsibilities – and you can register voluntarily. Here’s what you need to know:
- Once your business’ taxable supplies and imports exceed AED 187,500, you can voluntarily register for VAT.
- Once these exceed AED375,000, you have to register for VAT. Failure to do so can lead to legal consequences.
- If your business’ revenue falls below the threshold, you may apply for deregistration, subject to FTA approval.
We often recommend that businesses don’t begin VAT registration too early, however. The additional work (filing returns, keeping records) can add expenses quickly and make keeping cash flow positive more difficult – and this is especially true for SMEs and newer companies. Every business is different, so this can either be up to your discretion or the advice of your bookkeepers.
To conclude: UAE VAT is still a fairly misunderstood topic, but you can have an easier time staying compliant if you maintain awareness of your own obligations via this blog, the FTA’s website, or an expert. Here’s an article about all of the changes to VAT in the UAE as of 2026.
Pssst… We have a Linkedin page where we post about topics like this weekly.