UAE VAT: meaning of public transportation and treatment of farm houses and land

The supply of a bus or train that is designated or adapted to be used for 'public transportation' is zero rated for UAE VAT purposes. The FTA confirmed in its clarification notice VATP007 that zero-rating will only be available for buses/trains which are designed or adapted for use by all individuals and not just one category of person, such as schoolchildren, employees or hotel guests. The guidance lists factors in determining if a bus or train is designed or adapted for public transportation and lists vehicles which would not be considered as used for public transportation for VAT purposes.

"There is an interesting emphasis on the actual use of a vehicle and not just what it was designed or adapted to be used for. This is helpful for interpreting the application of the zero-rating for other means of transport," said tax expert Ian Hyde of Pinsent Masons, the law firm behind Out-law.com.

"The guidance should remind taxpayers that any VAT incurred on purchases, including on the purchase of vehicles directly relating to exempt domestic transportation will not be recoverable," he said.

The guidance on farm houses confirms that a farm house is a 'principal place of residence' (PPR) when it more permanently accommodates individuals and not when it is used merely, for example, as a weekend home.

Qualifying as a PPR, and therefore a residential building, would result in the farm house being exempt from UAE VAT, or zero-rated if it is the first supply of the farm house within three years of its completion.

The guidance also confirms that a farm house which houses both people as a PPR and guests as part of a bed and breakfast or motel arrangement, may be split for VAT purposes to determine the correct VAT treatment of each area of the farm house. No guidance is given on how to apportion common areas.

Bare land is exempt for UAE VAT purposes. The guidance confirms that the use to which land is put is a persuasive factor as to whether it is bare land or not. However, it states that the decisive test for farm land is the strict definition of bare land, which will not catch land covered by civil engineering works.

Farm land could therefore be commercial farm land qualifying as exempt bare land, or private farm land which would be subject to VAT. The guidance states that composite and multiple supply rules must be considered in the context of the sale of farms as a whole and gives specific examples of how the rules will operate.

VAT was introduced in the UAE on 1 January 2018 and is generally payable at the rate of 5%.