VAT Implications When Changing Permitted Use of Buildings in UAE

The UAE Federal Tax Authority recently released a public clarification outlining the Value Added Tax (VAT) rules regarding change of use of buildings in the country. This clarification aims to address common questions that arise when the permitted use of a building changes.

In this article, we provide an in-depth explainer covering:

• What the public clarification states
• When changing building use affects VAT applicability
• Key takeaways for property owners and investors
• Expert answers to technical queries

Section 1: VAT Public Clarification Explained

The public clarification specifies two important points regarding change in permitted building use:

• If the permitted use of a building changes, it may impact VAT registration and ongoing compliance requirements. For example, if a residential building gets approval for commercial use.
• Minor alterations that don’t completely change the nature of building use may not impact VAT. For example, getting approval for an additional use that is ancillary to the main residential purpose.

Additionally, the clarification is effective from 28 June 2021 onwards. Any changes in building use on or after this date will need to adhere to these VAT rules.

Section 2: When Does Changing Building Use Affect VAT?

Let us go over some common examples to understand when a change in permitted building use will alter its VAT status:

Residential Property Converted for Commercial Use

• If a residential building receives approval to be used commercially, it meets the VAT registration threshold. The owner must register it under VAT and charge tax on rental income.
• Date of VAT registration – The date on which the building permit was amended for commercial use.

Warehouse Converted to Offices

• When a warehouse gets approval to instead be used as offices for companies, it amounts to a VAT relevant change in use.
• Thus the building owner must VAT register it if rental income exceeds the mandatory threshold.
• Registration date – The warehouse-to-office amendment date of building permit.

Additional Commercial Use Approval

• If a residential property receives permission for partial commercial use in excess of mandatory limits, it requires VAT registration.
• Date when residential building crossed VAT registration thresholds.

No Impact Residential Additions

• Residential buildings adding secondary uses below VAT limits do not require registration.
• For instance – Approval for a gym, guard room, community hall for use of residents.

Section 3: Key Takeaways for Stakeholders

The clarification has implications for certain stakeholders:

Property Developers

• Account for VAT when planning for change of use of a project during development.
• Factor compliance costs into financial projections.

Building Owners & Landlords

• Understand cases where altering permitted use makes the property VATable.
• Maintain rental records, file VAT returns, and charge VAT when required.

Tenants

• Be aware that change in building use may lead to VAT being charged on rent.

Authorities

• Ensure relevant parties are informed when permitting change in building use.
• Enforce compliance to prevent tax losses.

Section 4: Expert Answers on VAT and Change in Permitted Use

We spoke to industry expert John Mathew, CEO of ABC Consultants, to address some key technical queries that remain:

What if Building Use Was Changed Before the Clarification Date?

The 28 June 2021 timeline applies only prospectively. Any past changes in use won’t be subject to this clarification provided they complied with the rules applicable at that point.

What Happens in Case of Multiple Business Activities?

If a building has approval for both VAT able and non-VAT able business activities, VAT registration is subject to crossing the mandatory threshold based on rental income from the taxable activity alone.

Can I Avoid VAT by Not Amending the Building Permit?

Not reflecting changes in actual building use amounts to non-compliance. The clarification aims to prevent revenue leakage by ensuring amendments to building permits mirror ground realities.

Conclusion

Altering the permitted use of buildings can increase their rental income but also brings VAT obligations. Through this article, our goal was to break down the specifics of the public clarification on change of building use and VAT registration. We have provided an in-depth look at how your VAT status gets impacted when changing approval of buildings from residential to commercial purposes and in other cases. Carefully considering such ramifications will enable compliant, profitable use of real estate assets.

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