Cabinet Decision No. 149 of 2026 changes the standard way a UAE business calculates residual input tax. That is the VAT credit on costs that serve both taxable and exempt work: rent on a mixed building, shared software, head-office overheads, professional fees that are not tied to one supply.
The decision was issued on 1 September 2026 and amends Article 55 of the VAT Executive Regulation, Cabinet Decision No. 52 of 2017. Clauses 6 and 7, and new clause 19, do not apply from 1 October 2026. They apply from the first tax year that begins after 1 October 2027.
If your VAT year ends on 31 December, the new method starts on 1 January 2028. Quarterly filers start when their own tax year turns, which can be February, March, or April 2028, depending on the stagger on the VAT registration certificate. Until that date, keep using the current input-tax method.
The same decision also amended bundled supplies, employee costs, cash payments, and credit-note wording, and those items are already in force. They are covered separately in Amendments in the VAT law under Cabinet Decision No. 149 of 2026. This note is only the credit calculation.
Who this actually hits
Input tax you can attribute wholly to a taxable supply stays fully recoverable. Input tax you can attribute wholly to an exempt supply stays blocked. The new percentage touches the residual pot in the middle.
A trading company that only makes standard-rated or zero-rated supplies will not see a new restriction. The exposure sits with businesses that have a real exempt book: banks, insurers, investment holding companies, residential landlords, schools, clinics with mixed supplies, and mixed-use developers.
If exempt income is a small slice of turnover and a large slice of directly attributable cost, or the other way around, the new percentage can move the VAT you get back by a wide margin. You will not know the direction until you run both methods on a full year of your own numbers.
The percentage moves from costs to sales
Today, the standard method splits residual input tax with an input-tax ratio. You take the input tax you can attribute directly to supplies that allow recovery. You divide it by the sum of that amount and the input tax you can attribute directly to supplies that do not allow recovery. You apply the percentage to the residual amount for the period.
Article 55(6) and (7) replace that with a supply-value ratio for taxable persons other than government entities and charities.
You take the value of supplies that allow input tax recovery under Article 54(1) of the VAT Decree-Law. You divide that by the total value of all supplies. You apply the resulting percentage to residual input tax.
Two amounts stay out of the fraction, so a one-off transaction does not rewrite the rate for the year:
- Supplies of capital assets attributable to you. Selling the building you occupy is not ordinary turnover. If you deal in property, separate stock held for sale from capital assets. A plot you trade belongs in the supplies figure. The office you use does not, when you dispose of it.
- Concerned goods and concerned services you receive under the reverse charge in Article 48 of the Decree-Law. Those are purchases. Leaving them in the calculation would let a large imported service swing the recovery rate.
The annual adjustment you already perform still applies, including the actual-use adjustment where the difference exceeds AED 250,000. The new rule changes the base of the percentage. It does not cancel the year-end true-up.
What the two methods can do to the same pot
These figures are an illustration of the mechanics. They are not a typical business, and they are not a forecast.
Residual input tax for the period is AED 200,000.
Under the current method, directly attributable recoverable input tax is AED 80,000 and directly attributable non-recoverable input tax is AED 20,000. The ratio is 80 percent. Recoverable residual input tax is AED 160,000.
Under the new method, supplies that allow recovery are AED 40 million and total supplies, after the exclusions above, are AED 100 million. The ratio is 40 percent. Recoverable residual input tax is AED 80,000.
Same residual pot. The credit halves. The gap can run the other way. If sales are mostly taxable and the costs you can attribute directly are loaded toward exempt work, the new percentage rises and the credit goes up. The only reliable version of this sum is the one built from your sales ledger and your input-tax allocation for a full tax year, with capital-asset supplies and reverse-charge receipts stripped out.
Direct attribution matters more, not less
Every dirham you tie wholly to taxable supplies, or wholly to exempt supplies, never enters the residual pot. The new ratio cannot touch it.
Businesses that have been leaving shared costs in residual because the old input-tax ratio was comfortable will feel this change first. A cleaner allocation, documented to the cost centre and the supply, shrinks the amount that depends on the turnover percentage. That work is worth doing in 2027, while the old method is still the one on the return, so you can see both results side by side.
Your VAT return does not currently store supply values in the shape Article 55 will ask for. You need a report that splits supplies which allow recovery from supplies which do not, and that can exclude capital-asset disposals and reverse-charge receipts without a manual cleanup at year end. Build that report before the first affected tax year, and run it in parallel for at least twelve months.
You can still ask the FTA for a different method
Article 55 still lets a taxable person apply for approval to use a special apportionment method. Use that route when turnover is a poor picture of how the business actually consumes costs. A bank, an insurer, a holding company, or a developer with a large exempt residential book may find that a sector method, a floor-area method, or another basis tracks use more closely than sales value.
A special method needs FTA approval before you rely on it. These applications are not granted in the week the new year starts. If the standard ratio looks wrong on the parallel calculation, prepare the application in 2027, with a year's comparison between the current method, the new standard method, and the method you want approved.
Government entities and charities stay on an input-tax ratio
New Article 55(19) gives government entities and charities their own rule. They do not move to the supply-value percentage.
Their recoverable percentage is directly recoverable input tax divided by directly recoverable plus non-recoverable input tax for the tax period. The percentage is rounded to the nearest whole number, then multiplied by the residual input tax.
Sales value is a weak measure where much of the activity is non-business. Clause 19 keeps an input-tax calculation for that reason. It starts on the same date as the new standard method: the first tax year beginning after 1 October 2027.
If you are a charity or a government entity, confirm you fall under clause 19, and keep the rounding in the working papers. A percentage left at two decimal places will not match the regulation.
Read the tax year on the certificate
The start date is not "sometime in 2028" for everyone. It is the first day of your tax year, as defined for VAT, if that year begins after 1 October 2027.
Monthly filers whose tax year ends on 31 December move on 1 January 2028. A quarterly business moves on the first day of the tax year printed against its stagger. Check the registration certificate. Do not assume January because the financial year ends in December. The VAT tax year and the accounting year are not always the same date.
Between now and that date, the current input-tax method remains the method on the return. Use the gap to model. Do not switch early. A return filed on the new percentage before your start date is the wrong law.
What to have ready before the year turns
- Run the supply-value percentage beside the current input-tax percentage for a full year. Use real ledgers.
- Exclude supplies of your own capital assets, and exclude reverse-charge receipts of concerned goods and concerned services.
- For property, mark trading stock and capital assets separately before either figure goes into the fraction.
- Tighten direct attribution so less cost sits in residual.
- If the turnover ratio misstates use, file a special-method application early enough to hold FTA approval before the year starts.
- Government entities and charities should confirm clause 19 and the whole-number rounding.
- Put the tax-year start date from the VAT certificate on the compliance calendar, next to the first return the new method will hit.
The other amendments in Decision 149, the ones already live, are a file review. This one is a model. It needs supply values you may not report today, and a clean line between capital assets and trading stock.
That is work we do. Three questions get most of the way there. What share of supplies is exempt? Where does residual input tax sit on the current returns? Which tax year is on the registration certificate? From those, you can see whether 2028 changes the VAT you get back, and by how much.
