Apportionment of Input Tax on Vehicle and Mobile Expenses in Bahrain

As per the Bahrain VAT Law, only Input VAT paid on expenses that are incurred by businesses for conducting their economic activity can be recovered from the National Bureau for Revenue (NBR)

In this blog, we shall discuss how Input VAT can be claimed in the case of Mobile phones and vehicles provided to the employees by the business and whether there is a simplified method for apportionment of Input Tax on mobile and vehicle expenses.

How to identify expenses used for economic and non-economic activity?

It is important to carry out the apportionment of Input Tax on a fair and reasonable basis with reference to actual usage underwritten policies and procedures of business for mobile phones and motor vehicles.

The expenses like mobile phones provided to employees of an organization, motor vehicle provided to employees call for both business and personal purposes.

Therefore, the cost incurred in respect of such expenses which attributes to both personal and business users should be identified and must be allocated between personal use and business use with the apportionment of Input Tax. The portion of the Input VAT which is subject to personal use cannot be claimed.

Apportionment of Input Tax for vehicles between business and personal use?

Apportionment on Input Tax for expenses should be allocated between their business and personal use taking into account their actual usage. In the case of Input VAT on expenses incurred for Vehicles used by the employees, apportionment of Input Tax should be done taking into account the actual distance traveled for business use and personal purpose separately. The distance traveled should be evidenced by logs documenting each journey carried out for business purposes.

For claiming the Input VAT on purchases of Vehicles, the business should consider the expected business use of vehicles. An adjustment must be done at the end of each VAT year to reflect the actual business and personal use of the vehicle.

How to apportion the expenses incurred for Mobile phones between business and personal use?

Input VAT on expenses incurred for mobile phones should be apportioned by reference to the cost of personal use. NBR has instructed to maintain written records on how personal use has been calculated.

It is very important to note in this regard that Input VAT cannot be recovered on mobile phone expenses without any bill, that is, Input VAT on prepaid Credit cannot be claimed. Therefore, the claim for Input VAT on prepaid accounts must be disallowed on the whole.

Also, Input VAT on mobile expenses can be claimed only if the business use of such expense exceeds 50% of the total use.

In the case of the purchase of mobile phones, the apportionment of Input Tax should be done based on expected business use and personal use. The same provisions of apportionment of Input Tax for vehicle purchase apply here. An adjustment must be done at the end of each VAT year to reflect the actual business and personal use of the mobile phone.

Is there any simplified mechanism identified by NBR for apportionment of Input VAT on Vehicles and mobile phones?

Recognizing the actual business and personal use of an expense and bifurcating the Input VAT paid on each would be a tedious task for business organizations. NBR has instructed a simplified method for apportioning expenses incurred for vehicles and mobile phones.

A business can follow a fixed rate for apportionment of Input Tax of vehicle expenses and mobile expenses provided to the employees which are used for personal use and business use.

NBR will accept the following apportionment rates:

• For vehicles: Business use can be computed as 40% of the total cost incurred in respect of vehicles and therefore, the personal use would constitute 60%.

• For Mobiles Phones: Business use can be computed as 60% of the total cost incurred in respect of mobile phones and therefore, personal use would constitute 40%.

A business can use this fixed rate of apportionment of Input Tax for both vehicles and mobile phones or opt to use only for one (that is, to apportion vehicle expense on the basis of fixed apportionment rate and mobile phone expense on the basis of actual use or vice versa).

If this method of apportioning is used, then the business should follow this method of apportionment of Input Tax for all assets in the relevant category. That is, if the business uses a fixed apportionment rate for vehicle expenses, then it should use it for all vehicles having personal use. Similarly, if the business uses the fixed apportionment for Mobile phones then it must use the same method for all mobile phones having personal use.

Also, a business that uses a fixed apportionment rate is not required to make adjustments at the end of each VAT year to reflect the actual personal and business use of mobile phones and vehicles.

From when can a business start to apply for a fixed apportionment rate?

A business can begin to apply a fixed apportionment rate from the effective date of VAT Registration.

In case, the business wants to use fixed apportionment method for a previous VAT period, whose VAT return is already filed, then the business can reflect any change in the Input VAT earlier claimed by using the correction column in the VAT return of the current VAT period or amending the previously filed VAT return(this is applicable if the underpayment of Net VAT due in the previous period is more than BD 5000), whatever the case may be.

Can the business use fixed apportionment rate and apportioning based on actual use simultaneously?

Once the fixed apportionment rate is used to claim Input VAT on expenses having personal and business use, then the same has to be used for a period not less than 2 years before switching on to an actual basis.

In case, the business wants to change the apportionment method used from the fixed apportionment rate method to an actual basis during these 2 years then it must apply to the NBR. NBR has full discretion to accept or reject such requests.

However, there is no requirement to inform NBR prior to using a fixed apportionment rate. However, NBR can disqualify a person from using the fixed apportionment rate.

Our Tax Experts in Emirates Chartered Accountants Group Bahrain believe in a proactive approach to tax advisory services with a cost-effective and tailor-made option that is preferred by businesses all over. Our team of professionals is well versed with the Bahrain VAT Law as well as the UAE VAT Law  They are also equipped with practical experience of implementing VAT in UAE and VAT in Bahrain.

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