UAE Clarifies VAT Recovery Rules for Employee Expenses from October 2026

The Federal Tax Authority has issued new detailed conditions governing when VAT-registered businesses may recover input VAT incurred on certain employee-related expenses.

Federal Tax Authority Decision No. 17 of 2026 applies where an employer provides goods or services to employees free of charge and there is a contractual obligation or documented company policy requiring those goods or services to be provided. The Decision covers six principal circumstances involving employee transport, food and beverages, accommodation, temporary accommodation for new employees, mobile and internet services, and parking. The new rules took effect on 1 October 2026.

Employee transport

Input VAT on employee transportation may be recoverable where the transport is provided between:

• the employee's residence and workplace;

• the employee's residence or workplace and a client's premises; or

• other locations directly connected with the employee's work duties.

The transport must not be provided for the employee's personal benefit, and the employee must not be able to choose a cash allowance or financial compensation instead. This means the existence of an employer-paid transport arrangement alone is not sufficient. The service must have a genuine employment-related purpose and satisfy all of the conditions set by the FTA.

Food and beverages

VAT recovery on food and beverages supplied to employees is significantly more restricted.

The FTA permits recovery where the employee's residence is in a remote, distant or isolated area and suitable food preparation facilities or nearby restaurants are not reasonably available. The food must also be directly linked to the work or residence period required by the employee's job, and the employee cannot be given the option of taking a cash allowance instead.

Businesses should therefore not interpret the Decision as allowing VAT recovery on ordinary staff meals, office refreshments or general employee catering.

Employee accommodation

VAT may also be recoverable on accommodation provided to employees where the accommodation is required because of the operational needs of the business.

Several conditions apply. The employee must not be able to take a cash housing allowance instead, and the accommodation must not form part of the employee's ordinary compensation or benefits package. The nature of the work must require the employee to live near the workplace, work site or client location. The accommodation must also generally be provided exclusively for the employee and be appropriate to the operational requirements of the job rather than offering significant recreational or personal benefits. The Decision therefore draws an important distinction between operational accommodation and normal employee housing benefits.

Temporary accommodation for new employees

The FTA has created a separate rule for temporary accommodation provided to new employees.

Input VAT can be recovered where:

• the accommodation is provided for no more than 30 days; and

• it is appropriate to the employee's job requirements and basic residential needs. FTA UAE

This may be particularly relevant to UAE businesses recruiting employees from overseas and providing short-term hotel or serviced accommodation while the employee arranges permanent housing.

Mobile phones and internet

Input VAT may also be recoverable on:

• mobile phones;

• airtime;

• mobile data packages; and

• home internet provided through a modem or router.

However, these must be necessary for the employee to perform their job, including remote working or business communication outside normal working hours. Use must be restricted primarily to business purposes. Any personal use must be incidental and insignificant. The employer must also have a documented internal policy governing permitted use and must operate reasonable monitoring mechanisms to ensure employees comply with that policy. Relevant records and explanations must be retained where unauthorised use occurs. This is particularly significant for businesses providing company mobile phones or paying employees' home internet expenses. Merely paying the bill does not automatically establish entitlement to recover the VAT.

Parking expenses

The Decision also addresses employee parking. Input VAT may be recovered where parking expenses are incurred solely for business purposes and directly relate to:

• the employee's performance of work duties;

• business visits; or

• other work-related assignments.

The employer must maintain a documented internal policy explaining when parking expenses may be reimbursed and how approval works. Supporting evidence must also be retained, including documentation showing the date, time, amount paid and VAT charged.

An important feature of the Decision is that documentation alone is not enough. The rules apply where there is a contractual obligation or documented employer policy, but each category has additional substantive conditions that must also be satisfied. For example, a company cannot simply add free accommodation, staff meals or mobile-phone expenses to its HR policy and then assume that the related VAT becomes recoverable. The nature of the expense, its business purpose, any personal benefit and the employee's ability to receive an alternative cash allowance all remain relevant.

NUR Advisory Note

Businesses should review employee-related VAT recovery following the 1 October 2026 effective date.

The Decision creates clearer opportunities for input VAT recovery, but it also places greater emphasis on documentation and the actual business purpose of the expense. A practical review should cover:

• HR policies and employment contracts;

• employee transportation arrangements;

• staff accommodation and housing benefits;

• temporary accommodation for new joiners;

• mobile-phone and internet policies;

• parking reimbursement procedures;

• supporting invoices and receipts; and

• controls distinguishing genuine business use from personal employee benefits.

Finance and HR teams should work together because entitlement to recover VAT may depend partly on how the benefit is described in employment contracts and internal policies.

Businesses should also avoid applying the rules retrospectively or automatically to every employee expense falling within one of the listed categories. Each expense should be assessed against the specific conditions in FTA Decision No. 17 of 2026.

For companies with significant employee accommodation, transportation or communication costs, the financial impact may be material enough to justify a structured review of existing VAT treatment.