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Many businesses recover VAT on major capital expenditures and assume the VAT treatment ends there.

But have you considered whether the Capital Assets Scheme (CAS) applies?

Under the UAE VAT Executive Regulations, a Capital Asset is generally a capital expenditure item with a taxable value exceeding AED 5 million (excluding VAT) and having a useful life of:
🏢 10 years – Buildings or parts of buildings
⚙️ 5 years – Other capital assets

The Capital Assets Scheme requires businesses to review the use of the asset annually and adjust previously recovered VAT if the percentage of taxable use changes.

Example
A machine is purchased for:
Taxable Value: AED 6 million
VAT: AED 300,000
Adjustment Period: 5 years

Initial use:
✅ 100% taxable activities
VAT recovered: AED 300,000

In Year 3, taxable use reduces to 70%.
Annual adjustment amount:
AED 300,000 ÷ 5 = AED 60,000
Change in taxable use:
100% → 70% = 30% reduction

VAT adjustment required:
AED 60,000 × 30% = AED 18,000

This adjustment may need to be made each year for the remaining adjustment period if the usage pattern continues.

Common Issues Seen During VAT Health Checks
❌ Capital assets are not identified separately in the fixed asset register.
❌ Businesses incorrectly use the VAT amount instead of the AED 5 million taxable value threshold when assessing applicability.
❌ No annual review is performed after the initial VAT recovery.
❌ Changes in taxable and exempt use are not monitored.
❌ No supporting documentation exists for allocation percentages.
❌ Adjustments are not made following business restructuring or changes in activities.

Key Takeaway

1. The Capital Assets Scheme is not a one-time VAT exercise.
2. For qualifying assets, businesses must monitor usage for:
a. 5 years for most capital assets, and
b. 10 years for buildings and parts of buildings.

The most important question is not whether VAT was recovered correctly when the asset was purchased.

The real question is: Has your business reviewed the asset every year since it was first used, as required under the Capital Assets Scheme?
Failure to do so may result in VAT underpayments, overclaims, and unexpected exposures during an FTA audit.

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