VAT capital assets scheme: the 10-year adjustment

The short answer

If you buy or build an asset costing AED 5 million or more, excluding VAT, the input VAT you recover in the first year is not final. Under Articles 57 and 58 of the VAT Executive Regulation, you monitor it for 10 years for a building and 5 years for other assets. Each year in which the share of taxable use differs from Year 1, you adjust one-tenth (or one-fifth) of the original VAT up or down.

The scheme matters for property owners, mixed-use developments, hospitals, banks and any business that makes exempt supplies, because a change in use can claw back VAT years after the purchase.

What counts as a capital asset

Cabinet Decision No. 149 of 2026 reworded the definition to refer to a business asset with a cost of AED 5 million or more, rather than a single item of expenditure. The Cabinet Decision 149 guide covers what that means for large expensed projects.

• A business asset with a cost of AED 5,000,000 or more, excluding VAT, on which VAT is payable.
• An estimated useful life of at least 10 years for a building or part of a building, or 5 years for other assets.
• Stock held for resale is never a capital asset.
• Staged payments add up: purchases or construction of a building, fit-out and refurbishment works (unless there is a distinct break between them), and goods assembled from separately supplied components are treated as one item once they reach AED 5 million.

The formula, step by step

• W: the input VAT incurred on the asset in Year 1. Year 1 is the tax year in which you acquire it, or for an asset you build yourself, the year you start using it.
• X: the percentage of W you recovered in Year 1.
• Q: each later year's recovery percentage for that asset, worked out under the normal partial exemption rules.
• R = W ÷ 10 × Q for a building, or W ÷ 5 × Q for other assets. Z = W ÷ 10 × X (or W ÷ 5 × X).
• If R is more than Z, increase your input tax by the difference. If R is less than Z, reduce it.
• Make the adjustment in the first tax period of the following tax year, the same period as the annual partial exemption wash-up. Record W, X and every adjustment in a capital asset register.

Selling the asset, or joining a tax group

If you sell or dispose of the asset before the period ends, the scheme stops in the year of disposal. Each remaining year is treated as if the asset were used wholly for the kind of supply the disposal is: fully taxable if the sale is taxable, fully exempt if the sale is exempt, and outside the business if it is not a supply in the course of business. All the remaining years' adjustments go into the return for the period of the disposal, so a taxable sale can release VAT that was blocked years earlier.

Transferring the asset as part of a business transfer, joining a VAT tax group or leaving one ends the tax year on that day, and a new tax year starts the next day with the asset's owner.

Worked example: a mixed-use building

A developer completes a building costing AED 50,000,000 plus VAT of AED 2,500,000 (W). In Year 1, 80% of the floor area is commercial (taxable) and 20% residential (exempt), so it recovers 80% (X), which is AED 2,000,000. One-tenth of W is AED 250,000, and Z = 250,000 × 80% = AED 200,000 every year.

Year 2: Q is 80%, so R equals Z and nothing changes. Year 3: two commercial floors convert to residential and Q falls to 60%. R = 250,000 × 60% = AED 150,000, so input tax is reduced by 200,000 − 150,000 = AED 50,000. Year 4: Q rises to 90%. R = AED 225,000, so input tax increases by 225,000 − 200,000 = AED 25,000.

Year 6: the developer sells the whole building as a taxable commercial supply. On the usual reading, Years 7 to 10 are treated as 100% taxable: 4 × 250,000 × (100% − 80%) = AED 200,000 of extra input tax, claimed in the return for the period of the sale. The capital assets scheme calculator builds this table for your own figures.

How Hysaab applies this

Hysaab flags a purchase that reads like a capital asset before it is expensed, and keeps the fixed asset register beside the ledger. Recording W and X for every asset of AED 5 million or more on the day it is acquired is what makes the annual Q test a ten-minute job rather than an archive search.

Questions people actually ask

Keep reading

• Tool: VAT capital assets scheme calculator
• Guide: Partial exemption in UAE VAT: apportioning input tax when you make exempt supplies
• Guide: VAT on UAE real estate: zero-rated, exempt and standard — and why the difference decides your input VAT
• Guide: Cabinet Decision 149 of 2026: what changes for UAE input VAT recovery from 1 October 2026
• Guide: VAT tax groups in the UAE: when grouping pays