The UAE VAT system is designed to promote transparency, fairness, and accuracy in tax recovery. The Capital Asset Scheme (CAS) is one of its key mechanisms. It ensures that businesses recover input VAT on large, long-term assets in proportion to their actual use for taxable activities over time. This system prevents over- or under-recovery of VAT, which could otherwise distort tax compliance and reporting.
For businesses making both taxable and exempt supplies, the scheme plays a vital role in maintaining correct VAT positions. Large capital investments, such as buildings, heavy machinery, or IT infrastructure, are significant for operational capacity, but their use may change over time compared to the initial years. Similarly, the ratio of their involvement in taxable versus exempt supplies may also change. The CAS helps align VAT recovery with these changes to reflect real taxable usage and ensure that the VAT system remains equitable for all taxpayers.
An asset qualifies for treatment under the CAS if its cost is at least AED 5,000,000 excluding VAT. The asset must also have a long useful life, which is ten years for a building or any part of a building, and five years for other capital assets such as equipment, vehicles, or high-value systems. When a building is constructed or purchased in stages, the payments for those stages can be added together to reach the AED 5 million threshold. This means that assets developed in phases are still covered under the scheme.
The principle of the CAS is that VAT initially recovered at the time of purchase is not considered final. Instead, it is adjusted annually over the asset’s useful life to match actual taxable use versus the exempt use. The adjustment period is ten consecutive years for buildings and five consecutive years for other assets. In the first year, VAT is recovered based on the intended taxable use of the asset. In later years, the business reviews the actual use of that asset during each period. If the proportion of taxable use differs from the original estimate, an adjustment is made in the VAT return of that year.
In other words, the whole of the input tax is recovered in year 1 as per the intended usage percentage. For example, if the total input tax paid is AED 500,000 and the ratio as per the intended use is 80%, the input tax recovered in the period of purchase will be AED 400,000. Note that we have recovered the full recoverable amount in year 1. This means for year 2, we have already recovered an amount of AED 40,000 (AED 400,000/10) in year 1. Now in year 2, if the actual taxable usage was 70%, the actual recoverable input tax should have been AED 35,000 (AED 400,000/10×70%) for year 2, but we already recovered AED 40,000. This means we recovered an extra AED 5,000 for year 2 and an adjustment of AED 5,000 is now required in year 2, i.e., AED 5,000 is payable to FTA.
Compliance with the Capital Asset Scheme depends on accurate and consistent record-keeping. Every business applying the scheme must maintain a Capital Asset Register. This register records key information, including the original input VAT incurred on each asset, the recovery percentage applied in the first year, and all annual adjustments made during the asset’s useful life. The register must also document the method used to calculate each adjustment. These records are required to be retained for at least ten years.
If an asset is sold, transferred, or the business deregisters for VAT before the end of its adjustment period, a final adjustment becomes necessary. The adjustment is calculated and reported in the VAT return for the period when the disposal or deregistration occurs. The remaining years of the adjustment period are treated based on the nature of the disposal. If the disposal or deemed supply is taxable, the remaining years are considered 100 percent taxable use. If it is exempt, they are treated as zero percent taxable use. This ensures that VAT recovery accurately reflects the final use of the asset.
The Capital Asset Scheme may appear complex, but it provides a fair and logical method to manage VAT recovery on significant business investments. It prevents businesses from benefiting from excessive input VAT recovery in cases where assets are later used partly or wholly for exempt activities. On the other hand, it allows additional recovery if taxable use increases over time. This balanced approach supports both compliance and fairness across the VAT system.
For businesses with substantial or mixed-use capital assets, maintaining discipline in tracking usage and reviewing the Capital Asset Register each year is essential. Inaccurate records or failure to perform annual adjustments can lead to errors that result in penalties from the Federal Tax Authority. The Authority expects businesses to demonstrate that their VAT claims and adjustments are based on documented calculations and reliable data.
Implementing the CAS effectively requires a systematic approach. Businesses should integrate CAS monitoring into their accounting systems and align their VAT reporting with internal asset management processes. Periodic internal reviews and consultations with VAT professionals help identify potential misstatements early. This proactive management reduces the risk of disputes, financial penalties, or compliance issues in the future.
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This article is for general informational purposes only and does not constitute legal, tax, or professional advice. The information is based on publicly available guidance and legislation in effect at the time of writing. While efforts have been made to ensure accuracy, the content may contain errors or omissions and may not reflect the most current legal developments. Readers should not act or refrain from acting based on this information without seeking advice from a qualified tax or legal professional. The author disclaim any liability for loss or damage arising from reliance on this article.
