VAT

The Capital Assets Scheme in UAE VAT

2026-03-02 · 5 min read · By Aureus Worldwide

When a business buys a high-value asset, a building, major plant or expensive equipment, the 5% input VAT it recovers depends on how the asset is used to make taxable supplies. But use can change over the asset's life. The capital assets scheme exists to keep VAT recovery fair over time, adjusting the amount recovered as the asset's taxable use rises or falls. This guide explains how the scheme works, which assets it covers, and when you must make adjustments.

Why the scheme exists

Normally, you recover input VAT on a purchase based on its use at the time of purchase. For a low-value item used and consumed quickly, that is fine. But a capital asset can be used for many years, and its use can shift, for example, a building might start out used for taxable supplies and later be used for exempt ones, or vice versa. Recovering VAT based only on year-one use would distort the position. The capital assets scheme spreads the assessment over several years so that recovery reflects actual use over the asset's life. It builds on the input recovery rules in our input tax recovery guide.

Which assets fall within the scheme

The scheme applies to high-value capital assets above a defined cost threshold that are used over a number of years. Broadly:

These are general positions; the cost threshold and the exact adjustment periods are set by the rules, so confirm them with the FTA. Assets below the threshold, and ordinary expenses, fall outside the scheme and follow normal recovery.

The adjustment period

The scheme works over an adjustment period, a set number of years following acquisition. In each year of the period, you compare the asset's taxable use in that year with the use on which the original recovery was based:

• If taxable use has increased, you may be able to recover more input VAT
• If taxable use has decreased, you may have to repay some input VAT
• If use is unchanged, no adjustment is needed for that year

The result is that, by the end of the adjustment period, the total VAT recovered should reflect how the asset was actually used across all those years, not just at purchase.

The scheme is self-correcting. If a building shifts from taxable to exempt use over the years, the scheme claws back the over-recovered VAT; if it shifts the other way, you recover more. Either way, recovery tracks reality.

A simple illustration

Imagine a business buys a commercial building used entirely for taxable supplies and recovers the input VAT in full. If, a few years later, part of the building is switched to exempt use, the scheme requires an annual adjustment for the remaining years to repay a proportion of the VAT, reflecting the reduced taxable use. Conversely, if a building initially used partly for exempt supplies later becomes fully taxable, the scheme can let the business recover more. The adjustments are made year by year across the adjustment period.

How the annual adjustment works

In broad terms, the annual adjustment compares the recovery percentage for the year with the original recovery percentage, applied to a portion of the total input VAT spread across the adjustment period. The mechanics are:

1. Identify the asset is within the scheme (above threshold, qualifying type)
2. Determine the original input VAT and the recovery basis at purchase
3. Assess the taxable use of the asset in the current adjustment year
4. Compare it with the original basis to find the change
5. Calculate the adjustment (additional recovery or repayment) for the year
6. Reflect the adjustment in the relevant VAT return

Because the precise formula and the spreading method are set by the rules, confirm the calculation with the FTA.

Disposals during the adjustment period

If you dispose of a capital asset before the end of its adjustment period, a final adjustment is generally required, treating the asset for the remaining period according to the nature of the disposal. For example, a sale that is a taxable supply may be treated differently from one that is exempt. Plan for this, because a disposal can trigger a larger one-off adjustment than the routine annual ones.

Why it matters most for property

The scheme has the biggest impact on property, because buildings are high-value, long-lived and frequently change use, between taxable commercial use, exempt residential use, and mixed use. A developer or investor whose property use evolves over time can face meaningful annual adjustments. This is why the scheme is closely linked to real estate VAT, covered in our commercial property VAT guide. For property businesses, tracking use year by year is essential.

Record-keeping for the capital assets scheme

The scheme demands records kept over the whole adjustment period, not just the year of purchase. For each capital asset within the scheme, keep:

• The cost and the input VAT incurred
• The original recovery percentage and basis
• The taxable use in each adjustment year
• The annual adjustment calculations
• Any disposal and the final adjustment

Because the period can span several years, durable, well-organised records are vital, losing track midway makes the adjustments hard to evidence. Integrating this with ongoing accounting keeps the asset history intact, and a regular audit helps confirm the asset register and recovery position are sound.

A note on changeable detail

The cost threshold, the adjustment periods and the calculation method for the capital assets scheme are set by the rules and FTA guidance and can be refined. Treat this guide as the framework and confirm the thresholds, periods and method with the FTA or a qualified adviser before relying on them.

How Aureus Worldwide helps

Aureus Worldwide helps UAE businesses identify which assets fall within the capital assets scheme, calculate the annual adjustments as taxable use changes, and handle the final adjustment on disposal. Our VAT and accounting teams maintain the multi-year records the scheme requires, and we direct you to confirm thresholds and periods with the FTA. To manage the capital assets scheme correctly, contact us.

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