The free work still carries VAT, and now it has a formula

The invoice was never raised. The VAT still is.

The work left the building. Nobody billed it.

A partner spends three weeks on a strategy paper for a property company they own personally. A design studio builds the sister company a brand pack and never raises an invoice for it. Somewhere else the shareholder has been using the IT firm helpdesk all year for a project that has nothing to do with the business. In the accounts it looks like nothing happened.

Article 11 of Federal Decree-Law No. 8 of 2017 treats some of those as a deemed supply. If input tax was recovered on the resources used, and the use was wholly or partly outside the business, there is a taxable supply to the extent of that non-business use. Article 37 then says the value is the total cost incurred to make it.

Cost, for a service, was the part nobody could agree on. Salaries carry no VAT. Rent and software do. Shared overheads sit across ten jobs. Advisers guessed. Some charged 5% on the fee they would have billed. Most charged nothing.

Directive on Tax Transactions No. 5 of 2026, issued on 20 July 2026, now gives a method. It is not a Public Clarification. Under Article 54 bis of Federal Decree-Law No. 28 of 2022 it binds the taxpayer and the FTA until it is replaced or withdrawn.

Article 11 is the trigger. The Directive only prices it.

Most of the risk sits before the arithmetic ever starts. Run the formula over something that was never a deemed supply and you have invented a liability nobody owed. The commoner failure runs the other way: Article 11 was engaged months ago, nobody noticed, and Box 1 has been short ever since.

Article 11 lists the cases. The one that catches free services is clause 3: goods or services on which input tax may be recovered, used wholly or partly for purposes other than the business. The deemed supply stops at that non-business use. A staff member who spends one day in five on a shareholder project is not a deemed supply of the other four.

Article 12 then takes cases back out again. Where no input tax was recovered in the first place there is nothing to deem. Exempt supplies are excluded, and so is anything already picked up by a capital-asset adjustment, on the sensible ground that the tax has been dealt with once already.

The money thresholds live in Cabinet Decision No. 52 of 2017, Article 5, as rewritten by Cabinet Decision No. 100 of 2024. Samples or commercial gifts of goods worth AED 500 or less per recipient in any 12-month period are out. And if the total output tax on all deemed supplies in 12 months stays at AED 2,000 or below, nothing is payable.

That second figure is tax, not value. AED 2,000 of output tax is AED 40,000 of value at 5%. Once you cross it, only the excess is payable. The 12 months are the twelve months ending with the month of the supply, not the calendar year and not the tax year.

The AED 500 line is goods only. A complimentary consulting day is not a sample. We still see returns that treat it as one.

If the input tax on the underlying costs was blocked in the first place, there is nothing to claw back. Entertainment that Article 53 never let you recover does not become a deemed supply when you hand it over.

Four steps, starting at a price you never charged

Clause 1 of the Directive tells a taxable person making a deemed supply of services to value it from the total costs on which input tax was incurred, direct and indirect, in accordance with Article 37. Clause 2 then prescribes how to get there.

Find the open market value of the services, or of comparable services if there is no market for this exact work. Divide that figure by one plus the net profit margin from the preceding financial year. That strips the profit and leaves an estimated total cost. Work out the percentage of prior-year costs on which input tax was incurred. Apply that percentage to the estimated cost. The result is the value.

Where the prior-year margin cannot be determined, the average net profit margin in the sector may be used. The Directive does not name a source for that average.

A worked example, using figures of the kind we see on owner-managed professional firms. It is an illustration, not a client.

Take a Dubai consultancy that produces a strategy paper for a property company the managing partner owns personally. The firm would have billed AED 120,000 for the same engagement. The prior-year accounts show a 25% net profit margin. Total costs were AED 4,000,000, of which AED 2,800,000 carried input tax.

The 5% sits on AED 67,200, not on AED 120,000. Charging VAT on the fee you would have billed is the thing the Directive was written to stop.

If earlier gifts or own-use already used up the AED 2,000, the full AED 3,360 goes on the return. The relief is per supplier per rolling 12 months, not per job.

Related parties can take you back to market value

Article 36 is an exception to Article 37. Between related parties the value is the market value if two conditions both hold: the stated value is below market, and the recipient cannot recover the full input tax.

Both conditions are usually met where the related company is not registered for VAT at all, and often enough where it is registered but makes exempt supplies and cannot recover in full. In those cases Directive 5 does not come into it. You take the open market value and charge 5% on that.

On the figures above, that is AED 6,000, not AED 1,360.

The Directive never mentions Article 36. It assumes you are already inside Article 37. Check the related-party test first. It is the dealings between connected companies that get looked at hardest, so understating those is the expensive version of this mistake.

Two companies inside the same VAT group are one taxable person. There is no supply between them, deemed or otherwise. The question only arises once they are separate registrants.

The file that contains nothing

In our experience the typical file does not contain a wrong Directive 5 working. It contains nothing.

Free owner work, staff used on a shareholder project, a sister company that never sees an invoice: they sit outside the VAT return because nobody raised a tax invoice, and the preparer treats the absence of an invoice as the absence of a supply. Article 11 does not require an invoice to create the tax. It requires a change of use.

The other version of the same habit is the opposite. The firm knows something should go on, so it puts 5% on the rack rate. That overstates the tax under Article 37, unless Article 36 has already moved you to market value.

Neither is a method. From 20 July 2026 there is one, and it is binding.

The margin is last year. The return is this one.

The margin and the cost ratio both come from the preceding financial year. Not the year the work was done. A firm that rebuilt its cost base in 2026 still uses 2025.

Keep those workings. The FTA has not published an acceptable-comparables note, and it has not named a source for the sector average. Your file is the defence: the engagement that was given away, the market evidence for the fee, the profit figure from the signed accounts, the cost split that produced the 70%.

The tax point is the date of the change of use, under Article 26(3). That is the period the output belongs in. It goes in Box 1 of the VAT201, split across the emirates in the usual way. There is no separate deemed-supply box.

If earlier periods already closed without the figure, the correction route depends on the tax difference. Above AED 10,000 you are on a voluntary disclosure. Below that, the next return can carry the adjustment. Leaving it sits there until someone else finds it.

The Directive is silent on when it starts, and on actual cost

The first silence is commencement. The Directive was issued on 20 July 2026 and published on the FTA register on 22 July. Clause 4 says it shall be published in the Official Gazette. Unlike Directive No. 2 of 2026, which named 1 August 2026 as its effective date, this one has no separate commencement. We are applying it to deemed supplies of services from the issue date. That is a working position, not a confirmed one.

Actual cost is the harder gap. Article 37 says the value equals the total cost incurred. The Directive says the taxable person shall calculate that cost using the four-step mechanism. It does not say the mechanism is a fallback for when actual costs cannot be identified.

A firm that can point to a timesheet and a purchase ledger may still have to use the market-derived figure. Whether that implements Article 37 or quietly replaces it has not been tested. No published decision reads the two together.

Until one does, file on the Directive. Argue the law later if the number is material.

A short checklist

An afternoon with the prior-year accounts settles most of this.

1. List every unpaid service in the last 12 months that went to an owner, a staff member, a related company or a private project. Date each one.
2. For each, ask whether input tax was recovered on the resources used. If it was not, stop. There is no deemed supply.
3. If the recipient is a related party who cannot recover the VAT, use market value under Article 36. Do not run Directive 5.
4. Otherwise run the four steps. Take the prior-year margin and the prior-year VAT-bearing cost ratio from the signed accounts, not from a budget.
5. Add the output tax on all deemed supplies in the rolling 12 months. If the total is AED 2,000 or less, nothing is payable. If it is more, put the excess in Box 1 of the period that contains the tax point.

Then keep the working. The next person to read it will not be you.