UAE VAT Input Tax Apportionment 2026: New Rules and 2027–2028 Implementation

Understanding VAT Input Tax Apportionment in the UAE

VAT input tax apportionment determines the amount of input VAT a business can recover when its purchases support activities with different VAT recovery treatments.

In the UAE, businesses that make both taxable and exempt supplies may need to divide the input VAT on shared expenses between recoverable and non-recoverable amounts.

For instance, a financial services company may earn taxable income from certain services while providing exempt services. Expenses such as office rent, accounting software, and utilities may support both activities. The business must determine the recoverable portion of the VAT associated with these shared costs.

Key update: Cabinet Decision No. 149 of 2026 revises the standard input tax apportionment method, with the new rules taking effect from the first tax year that begins after 1 October 2027.

What Are the New UAE VAT Apportionment Rules?

Cabinet Decision No. 149 of 2026 amends the UAE VAT Executive Regulation and introduces a revised approach to calculating recoverable residual input tax.

Under the new standard method, eligible businesses will calculate their recovery percentage using the value of qualifying supplies rather than relying on the existing standard input-tax-based recovery percentage.

The calculation must account for the transactions excluded under the amended regulations.

Government entities and charities follow a separate apportionment method. Businesses should therefore determine which provisions apply to their activities and legal status before updating their VAT procedures.

How Is Input VAT Apportionment Calculated Under the New Method?

Under the revised standard method, the recovery percentage is determined by comparing qualifying supplies with the total value of supplies, excluding transactions specified in the regulations.

The resulting percentage is rounded to the nearest whole number and applied to residual input VAT.

Example of UAE VAT Input Tax Apportionment

Consider a business with the following figures for an illustrative tax period.

 
Step 1: Determine the recovery percentage.

AED 3,000,000 ÷ AED 10,000,000 × 100 = 30%

Step 2: Calculate recoverable residual input VAT.

AED 100,000 × 30% = AED 30,000

Based on these illustrative figures, the business can recover AED 30,000 of residual input VAT.

This example demonstrates the calculation principle. The actual recoverable amount depends on the applicable legislation, qualifying supplies, excluded transactions, and the business’s circumstances.

Which Transactions Must Be Excluded From the Calculation?

The revised standard method requires certain transactions to be left out of the percentage calculation, including:

• Supplies of capital assets attributable to the taxable person.
• Receipts of concerned goods accounted for under the reverse-charge mechanism.
• Receipts of concerned services accounted for under the reverse-charge mechanism.

Businesses should review their accounting classifications to ensure that these transactions receive the correct treatment.

Including an excluded transaction incorrectly can affect the recovery percentage and the amount of input VAT claimed in a VAT return.

Do Government Entities and Charities Follow the Same Calculation?

No. Government entities and charities use a separate input tax apportionment method under the amended regulations.

Under this method, the recovery percentage is determined by comparing directly recoverable input tax with the combined total of directly recoverable and non-recoverable input tax for the tax period.

The calculated percentage is then rounded to the nearest whole number and applied to residual input tax to determine the recoverable

amount.

Eligible organisations should review Article 55 of the amended VAT Executive Regulation to establish which calculation requirements apply to them.

When Will the Revised VAT Apportionment Rules Apply?

Cabinet Decision No. 149 of 2026 introduces several VAT amendments that generally took effect on 1 October 2026. The revised input tax apportionment provisions, however, have a later implementation date.

The new method applies from the first tax year commencing after 1 October 2027.

For example, a business whose tax year begins on 1 January would generally apply the revised method from 1 January 2028, subject to confirmation of its applicable tax-year arrangements.

Businesses should establish their own implementation date rather than assuming that all VAT-registered companies must adopt the revised method simultaneously.

How Can Businesses Prepare for the New Rules?

Businesses can use this period to evaluate how the new calculation method could affect their input VAT recovery.

1. Examine Current VAT Recovery Practices

Review whether the business makes both recoverable and non-recoverable supplies. Determine whether shared expenses require input tax apportionment.

2. Review Revenue and Supply Records

Check whether accounting systems can generate complete and accurate information about the values needed for the revised calculation.

3. Classify Excluded Transactions Correctly

Identify relevant capital asset transactions and reverse-charge purchases. Ensure that excluded items are treated in accordance with the applicable provisions.

4. Compare Current and Revised Calculations

Use actual business figures to estimate the difference between the existing method and the revised approach. The effect may vary according to the business’s supply mix and expense structure.

5. Assess Alternative Apportionment Methods

If the standard method does not appropriately reflect how input VAT is incurred and used, determine whether an alternative method is available under the applicable Federal Tax Authority approval process.

6. Update Accounting and Compliance Procedures

Document the calculation process, allocate responsibility for checking the figures, and retain supporting records for VAT reporting and compliance.

Common Mistakes to Avoid

Businesses preparing for the revised rules should avoid the following errors:

• Continuing with the existing calculation without checking the applicable implementation date.
• Introducing the revised method before it applies to the relevant tax year.
• Including transactions that must be excluded from the calculation.
• Assuming that VAT registration makes every input VAT expense recoverable.
• Using incomplete supply data or inconsistent accounting classifications.
• Applying the standard method without considering the separate provisions for government entities and charities.

Reviewing these areas in advance can help businesses identify calculation and reporting issues before they affect their VAT returns.

How RMC Tax Consultancy Can Support Your Business

RMC Tax Consultancy assists UAE businesses with VAT compliance, accounting, tax-related services, and advisory requirements.

Businesses preparing for the revised input tax apportionment rules can review their existing VAT recovery calculations, transaction classifications, accounting records, and reporting procedures with professional support.

A structured review can help identify potential calculation errors, estimate the effect of the regulatory changes, and establish an implementation plan suited to the business’s activities.

To learn more about the available services, visit RMC Tax Consultancy or read the existing guide to UAE VAT changes in 2026.

FAQ

1. What does VAT input tax apportionment mean in the UAE?

VAT input tax apportionment determines the recoverable share of input VAT when business purchases support activities that have different VAT recovery treatments.

2. What is Cabinet Decision No. 149 of 2026?

It is a UAE Cabinet Decision amending the VAT Executive Regulation, including provisions concerning input tax apportionment, employee-related expenses, and other VAT matters.

3. When do the new input VAT apportionment rules take effect?

The revised apportionment provisions apply from the first tax year commencing after 1 October 2027.

4. How is the revised input VAT recovery percentage calculated?

Under the revised standard method, qualifying supplies are compared with the total value of supplies, subject to the prescribed exclusions. The resulting percentage is rounded to the nearest whole number and applied to residual input VAT.

5. Are government entities and charities subject to the same method?

No. Government entities and charities have a separate apportionment method under the amended provisions. They should determine the requirements relevant to their status.

6. Can a business use an alternative apportionment method?

An alternative method may be available subject to the applicable Federal Tax Authority approval requirements. Businesses should confirm the relevant conditions before adopting another method.

Posted in Vat Updates