A keyword-rich, practical explainer for corporate taxpayers in Saudi Arabia on how to handle VAT input tax adjustments when capital or operating assets are re-purposed, moved to exempt activities, or disposed. Includes capital asset scheme rules, partial exemption (pro-rata), deemed supplies, and step-by-step filing tips for ZATCA.
Become Our Featured Tax Expert.
This premium ad space is reserved for one tax professional. Put your firm in the spotlight and reach qualified Saudi Arabia leads directly.
To claim this exclusive spot, contact us at [email protected].
Overview: When do input tax adjustments apply?
Under Saudi VAT (15%), you may need to adjust previously reclaimed input VAT when:
- Change of use: an asset or service initially used for fully taxable activities is later used partly or wholly for exempt or non-business purposes (or vice versa).
- Capital assets: ongoing use changes during a defined adjustment period (multi-year) trigger a clawback or extra recovery.
- Disposal without output VAT: certain disposals, transfers, gifts, or private use can be deemed supplies, requiring output VAT and/or input VAT adjustment.
- Partial exemption true-up: your actual annual pro-rata differs from the provisional rate used during the year.
- Deregistration or business closure: remaining assets may cause deemed supply and adjustments at the time of deregistration.
Capital Asset Scheme: Periods & mechanics
The capital asset scheme (CAS) tracks high-value assets over multiple years to ensure input VAT reflects actual taxable use over time.
| Capital asset class (typical) | Indicative adjustment period | Notes |
|---|---|---|
| Land & buildings (real estate) | 10 years | Annual monitoring of taxable vs. exempt use. |
| Other capital equipment (plant, machinery, vehicles) | 5 years | Track each year’s use & adjust in the VAT return. |
Tip: Confirm the exact categories and thresholds in your capitalisation policy and keep a capital asset register that flags VAT adjustment periods and start dates.
Change of Use: From taxable ↔ exempt/mixed
When an existing asset’s intended or actual use changes, adjust input VAT prospectively for the remaining years of the CAS (for capital assets) or through your annual partial exemption true-up (for operating costs and small assets).
| Scenario | Impact on input VAT | What to do |
|---|---|---|
| Fully taxable → partly exempt | Repay a portion (clawback) for remaining CAS years | Compute adjustment fraction; post as output VAT/negative input adjustment |
| Partly exempt → higher taxable use | Recover more input VAT for remaining CAS years | Book positive input adjustment in the return |
| Transfer from business to private use | Input VAT clawback and/or deemed supply at fair value | Document valuation and usage logs; adjust in the period of change |
Disposal, Scrap, Gifts & Deemed Supplies
- Taxable sale of assets: Charge output VAT at 15% on the selling price if the sale is within the scope of VAT; no separate CAS clawback is usually needed because output VAT is accounted for on the disposal.
- Exempt/out-of-scope disposal: May trigger a clawback for the remaining CAS period because future taxable use ceases.
- Gifts & free transfers: Can be deemed supplies if prior input VAT was recovered—output VAT may be due on market value.
- Scrap/abandonment: If no output VAT is charged (e.g., destroyed with documentation), consider whether a clawback is required; retain evidence of destruction and approvals.
- Deregistration: Assets on hand at deregistration can be deemed supplied; account for output VAT and/or CAS adjustment in the final return.
Partial Exemption: Annual pro-rata & corrections
For entities making both taxable and exempt supplies (e.g., financial services, education, real estate leasing), input VAT on overheads and mixed-use costs is recovered using a pro-rata (partial exemption) method.
- Provisional rate in-year based on a reasonable forecast (e.g., taxable revenue / total revenue).
- Year-end true-up using actuals; declare an input adjustment (increase or decrease) in the first return after year-end.
- Methodology: Revenue-based is most common; alternative methods (e.g., floor area, headcount) may be used if more accurate—document rationale.
Note: Capital assets follow the multi-year CAS while overheads follow the annual partial exemption true-up. Keep them separate in your registers.
Formulas & Numerical Examples
1) Capital Asset Scheme (change of use mid-period)
Adjustment = Input VAT × (Remaining CAS years ÷ Total CAS years) × (Old taxable % − New taxable %)
Example: Machine cost SAR 1,000,000; VAT = 150,000. CAS = 5 years. Initially 100% taxable. After year 2, use drops to 60% taxable (3 years remaining).
- Difference in use = 100% − 60% = 40%
- Remaining ÷ total = 3 ÷ 5 = 0.6
- Adjustment = 150,000 × 0.6 × 0.40 = SAR 36,000 (repay as output VAT/negative input adjustment)
2) Partial Exemption (annual true-up)
Provisional pro-rata used during the year = 70%. Actual pro-rata at year-end = 62%. Total overhead input VAT for the year = SAR 2,000,000.
- Extra recovered in-year = 2,000,000 × (0.70 − 0.62) = SAR 160,000
- Declare −160,000 as an input tax adjustment in the first return after year-end.
3) Disposal without VAT (exempt)
Real estate acquired with VAT of SAR 3,000,000; CAS = 10 years. Disposal becomes exempt in year 6 (5 years remaining). Taxable use falls to 0%.
- Adjustment = 3,000,000 × (5 ÷ 10) × (1.00 − 0.00) = SAR 1,500,000 (clawback)
Filing on ZATCA: Practical return mapping
- Identify the driver: CAS event, partial exemption true-up, disposal, or deemed supply.
- Post the entry:
- Clawback → record as output VAT or a negative input adjustment line (per your ERP mapping).
- Additional recovery → record as a positive input adjustment.
- Deemed supply → calculate output VAT on fair value and report under outputs.
- Attach evidence (if requested): CAS register extracts, valuation documents, pro-rata working papers, board approvals.
- Reconcile: Ensure VAT return ties to GL, fixed asset register, and e-invoicing (where relevant).
Internal Controls, Evidence & Audit Readiness
- Capital asset VAT register with start date, total input VAT, CAS duration, annual use %, and adjustment posted.
- Partial exemption file with method rationale, provisional rate, annual true-up, and management sign-off.
- Change-control approvals for re-purposing assets (emails, minutes, usage logs, floor plans, telematics where relevant).
- Valuations for deemed supplies (sale comparables or independent valuation) kept on file.
- ERP mapping to segregate clawbacks, additional recoveries, and deemed outputs for easy reporting.
FAQ (Saudi VAT)
Do I adjust input VAT on low-value assets?
Usually no CAS for small items—use the annual partial exemption true-up if they are mixed-use overheads.
What if use fluctuates each year?
For capital assets, adjust each year for the remaining CAS period. Keep a rolling schedule and evidence of usage percentages.
Are all disposals deemed supplies?
No. Taxable sales are reported with output VAT. Deemed supplies arise mainly for free transfers, private use, or removals from taxable business.
Can I switch partial exemption methods?
Yes, if the new method is more accurate and consistently applied. Document the rationale and keep approvals.
SEO Takeaways for Corporate Readers
- Saudi VAT input tax adjustment rules for change of use and asset disposal.
- Capital asset scheme (typical 5/10-year periods) and partial exemption pro-rata true-ups.
- Deemed supplies, private use, and deregistration—how to compute output VAT.
- ZATCA VAT return mapping: output vs. input adjustments and documentation to keep.
- Internal controls and audit readiness for Saudi corporate taxpayers.
