If you make payments in installments for your lease, you might need to be aware of a specific period when VAT applies.
How will VAT be applied to staggered payments for a lease contract?
When a seemingly innocent question sparks lengthy discussions about taxes, it highlights the intriguing nature of taxation and one’s fascination with the subject.
The initial question appeared simple: What are the VAT consequences of a 4-year equipment lease with eight semi-annual invoices? In the business world, this question encompasses a wide range of transactions.
Whether you’re leasing goods, vehicles, commercial real estate, or intellectual property rights, the VAT implications are crucial for lessors to consider. It’s commonly assumed that VAT will be payable in installments upon the issuance of each of the eight semi-annual invoices.
VAT is calculated based on the ‘date of supply’ for goods or services. The ‘date of supply’ for contracts involving periodic payments or consecutive invoices is clearly defined as the earliest of:
1. The date of issuing a tax invoice.
2. The payment due date as stated on the tax invoice.
3. The date of payment receipt.
4. The date of one year’s expiration from when the goods or services were provided.
If a tax invoice is issued or payment is received, VAT is due only on the amount mentioned in the invoice or the payment. The remaining VAT will be payable later, following VAT laws.
The real challenge arises for long-term contracts when one year has elapsed. Does VAT become immediately payable on the entire remaining value?
Consider a four-year commercial property lease for Dh2 million with advance invoices of Dh250,000 issued every six months. The first two tax invoices, issued before one year from the contract date, should trigger VAT on the first Dh500,000.
For the remaining amount, the one-year threshold will pass before the issuance of subsequent invoices or payments. This raises the question of whether VAT becomes immediately payable on the remaining Dh1.5 million upon completing one year.
The ‘date of supply’ provisions don’t account for apportioning the contract value over the contract period or calculating a proportionate value at the one-year mark. Without such apportionment, the ‘date of supply’ could apply to the entire remaining value once the one-year period expires.
It could be argued that leasing services involve the daily transfer of the right to use the property throughout the contract period, meaning the one-year period never expires.
In leasing transactions, the service essentially revolves around transferring the right to use the property. This transfer happens at a specific point in time, not over a duration. While the right to use the property may span a period, the transfer itself occurs once upon signing the contract.
Concerning extended car leases, it’s clarified that the ‘date of supply’ will be the earliest of the three specified dates, provided it doesn’t exceed one year from the start of the lease.
Hence, leasing services should be considered ‘provided’ at the beginning of the leasing period. At the one-year mark, without apportionment, the ‘date of supply’ for the entire remaining value could be triggered, resulting in a substantial VAT liability.
Instances of annual tax points in cases of continuous supplies can be found in the VAT/GST laws of the UK and India.
In the UK, the annual tax point applies only to taxable supplies between related parties when the recipient can’t fully recover the input VAT. Since related parties with incomplete input VAT recovery exist, the VAT accounting could be indefinitely delayed without issuing VAT invoices or exchanging lease payments. The creation of an annual tax point prevents this indefinite delay and requires apportioning the contract value over the contract period.
The current UAE VAT provisions don’t address such specific scenarios, which means they could apply to all instances of continuous services.
VAT implications could also impact corporate tax. Recovering input VAT on the entire remaining value might necessitate recognizing deferred tax assets/liabilities in the financial records.
Taxation is about seeking the right answers. It demands asking the right questions, whether consciously or innocently, and being willing to challenge mere hearsay about potential tax consequences.
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