Updated Guide on VAT Input Tax Apportionment in the UAE: Key Changes for 2025
The Federal Tax Authority (FTA) on September 30, 2025, released an updated guide on Input Tax Apportionment under UAE VAT. The document refines how businesses calculate and report partially recoverable input tax, particularly those involved in both taxable and exempt activities. It builds on the framework introduced in 2018 and clarifies the use of the Specified Recovery Percentage (SRP) method, which became effective in November 2024.
Overview
Input tax apportionment isn’t new, but it remains one of the most technical VAT areas in the UAE. For sectors such as banking, healthcare, and real estate, getting the calculation wrong can distort VAT recoveries for years.
The FTA’s latest update seeks to align practices and reduce uncertainty. It gives businesses a clearer roadmap on how to determine recoverable input VAT while tightening documentation expectations. That balance, clarity with control, is at the heart of the new guidance.
Understanding Input Tax and Its Recovery
Under UAE VAT Law, input tax is the VAT a business pays on goods and services it buys for commercial use. Businesses can reclaim this tax if certain conditions are met: a valid tax invoice, the intent to pay the supplier, and use in a taxable business activity.
Some costs are fully recoverable. Others linked to exempt activities like residential leasing or specific financial services are not. Many fall in between. These “mixed-use” expenses need proportional allocation. That’s where apportionment comes in, and that’s where most confusion happens.
What Input Tax Apportionment Means
When a business earns both taxable and exempt revenue, it can’t claim back every dirham of input VAT. Instead, it applies an apportionment method to calculate the recoverable portion.
In practice, this means spreading VAT costs between activities – often based on how much of the total income each side generates. Overheads such as rent, utilities, and administrative costs are common examples where this rule applies.
Standard Apportionment Method
The FTA guide reaffirms the standard pro-rata method as the default approach. It’s a straightforward ratio:
taxable supplies divided by total supplies. Multiply that percentage by your shared input VAT, and you get your recoverable amount.
Simple on paper. But in reality, timing differences, credit notes, and exempt adjustments can complicate things fast. That’s why the annual reconciliation remains essential. It corrects the provisional figures used throughout the year and ensures accurate reporting.
Specified Recovery Percentage (SRP) Method
The SRP method, introduced in November 2024, gets a fuller explanation in this update. It allows eligible businesses to apply a fixed recovery percentage based on the prior year’s actual apportionment, but only after obtaining FTA approval.
For many businesses, this approach cuts down the monthly calculation burden. It’s useful where income patterns remain consistent year to year, such as in established financial or education institutions.
The trade-off? Once approved, the SRP must reflect reality. If a company’s operations shift or new revenue streams emerge, it needs to inform the FTA and possibly reapply. That clarity helps both auditors and finance teams.
Application Timelines and Adjustments
Apportionment adjustments continue to pass through periodic VAT returns, followed by a mandatory annual reconciliation at the end of each tax year. The updated FTA guide sets out clearer timing and reporting expectations for these reviews.
Key timelines and requirements include:
- Annual reconciliation: Must be completed within four months after the end of the financial year.
- Reporting adjustments: The final recovery percentage should be reflected in the first VAT return following that reconciliation.
- Business changes: Any material change in business activity — for example, adding an exempt supply or closing a taxable line — must be reported to the FTA within the specified limit.
- SRP reviews: Entities using the Specified Recovery Percentage (SRP) method must reapply or seek reapproval if actual recovery rates deviate significantly from the fixed rate.
In practice, this means businesses can’t wait until year-end to reconcile. Mid-year checks help identify recovery variances early and prevent compliance gaps.
Missing the four-month reconciliation window or delaying FTA notifications can result in administrative penalties and interest adjustments. It’s not just about compliance; these deadlines directly affect cash flow and audit readiness.
Special Apportionment Methods
Some operations are too complex for standard ratios. The updated guide recognizes this and allows special apportionment methods where the normal pro-rata approach doesn’t reflect actual business use.
Approved alternatives include:
- Outputs-based method: Calculates recoverable input VAT according to the value of taxable outputs rather than total supplies. It suits businesses where sales values better reflect resource use.
- Transaction-count method: Uses the number of taxable versus total transactions to determine recovery. Common in service industries with high transaction volumes but small margins.
- Sectoral method: Applies separate recovery rates for different business divisions. Financial institutions and conglomerates often use this where activities vary significantly across departments.
- Floorspace method: Allocates input VAT based on the physical area used for taxable versus exempt activities – practical for retail, real estate, and mixed-use facilities.
On the other hand, these options aren’t automatic. Businesses must demonstrate to the FTA that the chosen method produces a fairer and more representative result than the standard formula. The approval process involves detailed justification, supporting calculations, and documentation and not just a preference for convenience.
That balance between flexibility and control is deliberate. It allows businesses with complex models to recover input VAT fairly, while ensuring consistency across the system.
Practical Compliance Guidance
The FTA’s message is consistent: keep evidence and stay organized. Working papers showing how each calculation was made should be readily available. So should supporting records that explain assumptions or adjustments.
This may sound simple, but it’s easy to overlook. Many disputes arise from missing internal documentation rather than incorrect math.
Regular internal reviews can also help identify shifts in business use before they trigger compliance issues. For growing companies, this kind of proactive review matters more than ever.
Impact on UAE Businesses
The update brings both relief and responsibility. It provides clearer direction, yet expects stronger compliance control. Businesses can now choose simpler methods like SRP but must also prove they use them correctly.
For finance teams, the immediate challenge lies in adapting accounting systems to capture taxable and exempt use more precisely. For auditors, the revised framework should lead to more consistent treatment across sectors.
Outlook
The 2025 update continues the FTA’s move toward data-driven VAT supervision. It aims to streamline compliance for consistent taxpayers while tightening oversight where recovery patterns deviate.
Businesses should take this as an opportunity to review their current apportionment methods before year-end. Those operating across mixed sectors – especially financial, education, or real estate – will feel the most impact.
References
- Updated Input Tax Apportionment Guide issued by the Federal Tax Authority (FTA) on September 30, 2025. Read the October 2025 analysis prepared by the KPMG member firm in the UAE.
- https://tax.gov.ae/DataFolder/Files/Pdf/VAT-Decree-Law-No-8-of-2017.pdf
- https://dhruvaconsultants.com/wp-content/uploads/2025/06/FTA-Public-Clarification-UAE-VATP040.pdf
