Unclaimed input tax: how to review and recover it

Where input tax goes missing

• Invoices that arrive after the period is closed and are never carried into a later period.
• Invoices that do not meet the requirements, such as an incorrect business name or VAT number, or simplified invoices for large purchases.
• Import VAT shown in customs declarations that has not been reconciled to the books.
• Imported services subject to the reverse charge: if they are not recorded, both the output tax and the input tax are missing, a situation that calls for assessing how to correct it rather than simply deducting.
• Purchases of capital assets and construction projects handled outside the normal purchasing cycle.
• Cautious apportionment rates in businesses with mixed supplies, or a missed annual adjustment.

Conditions for deduction

The right to deduct rests on four main conditions in the Implementing Regulations:

1. 01A valid documentA tax invoice that meets the requirements and is issued to the business, or the customs documents for imports. ZATCA may accept alternative evidence in specific cases at its discretion.
2. 02Use in the businessThe purchases must be used in carrying on the economic activity to make taxable supplies.
3. 03Not blockedThey must not fall within the categories the Regulations restrict, such as private use, entertainment services, hospitality and catering unless required by law, and restricted vehicles.
4. 04ApportionmentWhere there are exempt supplies the deduction must be apportioned, with the annual adjustment made on the actual figures.

The time limit

Article 49(8) of the Implementing Regulations allows input tax to be deducted in a later tax period, but not in any period that falls more than five calendar years after the calendar year in which the supply took place. ZATCA's guideline explains that tax not deducted in its own period can be included in a later return instead of amending the return for that period.

In practice, tax on supplies made during 2021 can only be deducted in a return for a period ending on or before 31 December 2026; supplies made in 2022 follow at the end of 2027, and so on. After that, the right to deduct is lost.

The other side of the review

A review that looks for amounts to recover should also look for what must be reversed. If input tax has been deducted and the consideration for the supply has not been paid in full within twelve months from the month following the supply, the deduction must be adjusted, with specific exceptions including ongoing disputes and certain financing contracts addressed by the 2025 amendments. The same applies to amounts deducted on invoices that do not meet the requirements.

Dealing with both directions gives the claim greater credibility if it is examined.

How the review is done

1. Set the scope and the priorities, starting with the years closest to the end of the time limit.
2. Extract purchase data from the accounting system and reconcile it with what was included in the returns.
3. Reconcile imports with customs declarations, and imported services with reverse-charge entries.
4. Test the documents: the validity of the invoices, the eligibility of the expense and its link to taxable activity.
5. Recalculate the apportionment rates for the years under review.
6. Prepare a supporting file for each amount, and decide which return it goes into.
7. Be ready for verification: large amounts, especially where they produce a credit balance claimed as a refund, may lead ZATCA to request or examine the documents.

In summary

Undeducted input tax is a cost the business bears without the law requiring it. Reviewing it is well-defined work with a measurable result, but its value depends on timing: every year that passes takes a full year out of what can still be recovered.