Abu Dhabi – The Federal Tax Authority (FTA) asserted that labour accommodation can be classified into two categories for tax purposes, taking into consideration whether the facility provides additional services – making it subject to the standard 5% Value Added Tax (VAT) – or is a purely residential building and therefore exempt from VAT (or zero-rated if the first supply).
The FTA had issued a clarification about tax treatment for labour accommodation, one of a series of publications launched through its website to raise tax awareness and ensure auto-compliance with tax regulations. The new service can be availed by visiting: https://www.tax.gov.ae/ar/public-clarification.aspx
The Authority underlined the importance of accurately determining the type of labour accommodation, seeing as it would affect the VAT incurred by the supplier. Suppliers are required to consider the extent of the additional services supplied along with the accommodation in order to determine the nature of the supply. They should also consider whether they are making a single composite supply, or whether they are making a mixed supply of several different component parts, seeing as in some cases, these services are treated as regular supplies for a residential building, while in other cases, they are treated as supplies to a serviced accommodation.
The Authority went on to explain that “labour accommodation” refers to areas utilised by employers to house their staff – some of which offer additional services. The FTA outlined four cases where these facilities are treated as residential buildings exempt from VAT (or zero-rated if the first supply), namely: The building or lodging is occupied by the employees as their principal place of residence; it is a building which is fixed to the ground and which cannot be moved without being damaged; the building has been constructed or converted with lawful authority; and finally, it is not a building that is similar to a hotel, motel, bed & breakfast establishment, or serviced apartment, for which services in addition to the supply of accommodation are provided.
The Federal Tax Authority explained that with regards to accommodation where extra services are provided, it must be determined whether the amount of these services transforms the building from a residential building to a serviced accommodation. There are “ancillary” services that are typically provided – for no additional cost – as part of supplying a residential building, which form part of the first supply; these services do not transform the facility into a serviced accommodation subject to VAT.
Ancillary services include: Cleaning of communal areas; maintenance services required for the general upkeep of the property; pest control; garbage collection; security; utilities, e.g. electricity, water, etc.; access to facilities within the building for residents to use themselves, e.g. launderette facilities, gym, pool, prayer rooms, etc.
Meanwhile, some of the additional services that do transform an accommodation into a serviced accommodation – and therefore, subject to 5% VAT – include: Telephone and internet access; cleaning of the rooms, other than purely the communal areas of the property; laundry services, including the regular changing of bed linen; catering; and maintenance services other than those required for the general upkeep of the property.
The FTA noted that suppliers of labour accommodation should also consider whether they are making a single composite supply (of either residential accommodation, or serviced accommodation based on the above), or whether they are making a mixed supply with separate component parts. Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component. Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.
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