Partial exemption in UAE VAT: apportioning input tax when you make exempt supplies

Who this catches

Partial exemption is not a niche bank problem. A landlord with one residential unit, a trading company doing a little margin-based FX, a school with a bus service — any business making both taxable and exempt supplies recovers input VAT only in part, and needs a method for the split. Most discover this at their first audit rather than their first return.

The three pots

• Directly attributable to taxable supplies — fully recoverable (subject to the usual blocked categories)
• Directly attributable to exempt supplies — not recoverable at all
• Residual — overheads, rent, audit fees, software: everything serving the whole business, recoverable only in proportion

The ratio and the true-up

The standard method computes the recoverable share of the residual pot from the ratio your attributed input tax already implies — recoverable attributed input tax over total attributed input tax — rounded per the regulations, applied return by return. Then once a year comes the wash-up: recompute the year as a whole, compare with what was actually recovered, and adjust the difference in the prescribed period. Businesses whose mix moves through the year routinely find the annual adjustment larger than any single quarter's residual claim.

Where the standard method produces a result that doesn't fairly reflect actual use, the regulations allow a special method with FTA approval — sector-specific approaches exist, but the default assumption should be the standard method until the FTA agrees otherwise in writing.

The traps

• Recovering everything because exempt supplies feel incidental — the test is making exempt supplies, not majoring in them
• No cost-attribution discipline, so the residual pot swallows costs that were directly attributable — in either direction
• Skipping the annual adjustment entirely — it is a required calculation, not an optional refinement
• Forgetting the de minimis-style relief does not exist here the way it does in other regimes — small exempt streams still trigger the mechanics

How Orbit applies this

Orbit attributes each cost line to taxable, exempt or residual as documents post, computes the period ratio and the recoverable residual automatically, and runs the annual wash-up from the same records — so partial exemption becomes arithmetic on clean attributions instead of a year-end estimate.