April 2025: Updated Input Tax Restrictions post VAT amendments

The April 2025 amendments to the Saudi VAT Implementing Regulations brought the most significant update to the Input Tax recovery framework since the VAT system launched. For many businesses, these changes mean reviewing positions they may have considered settled.

The amendments — issued pursuant to the ZATCA Board of Directors Resolution and effective from April 2025 — updated multiple provisions across the VAT Implementing Regulations. For Input Tax specifically, the key changes sit in Article 50 (blocked expenditure). They expand the list of blocked categories, refine definitions, and clarify exceptions. This article consolidates all the Input Tax recovery changes in a single reference, comparing the old and new positions and identifying where immediate action is needed.

The April 2025 amendments addressed areas where the original Implementing Regulations had created uncertainty or had not kept pace with commercial practice. In the Input Tax area, the two main drivers were:

Employee benefits ambiguity. The original Article 50 did not explicitly address healthcare and insurance costs provided to employees. Some businesses were recovering Input Tax on group health insurance premiums; others were not. The amendment resolved this by explicitly blocking the recovery — unless legally mandated.

Motor vehicle definition disputes. The previous definition of Restricted Motor Vehicle — turning on whether the vehicle was available for private use — was commercially contested and generated frequent disputes with ZATCA. The new capacity-based test (10 persons or fewer) is more objective and easier to apply consistently.

The most significant change for most businesses is the explicit addition of healthcare and insurance to the Article 50 blocked list.

What “Legally Mandated” Means

The exception preserves Input Tax recovery where the employer is legally required to provide the healthcare or insurance benefit under applicable Saudi Arabian law. This is a specific legal obligation — not a commercial expectation, market practice, or contractual commitment to employees. Finance and HR teams need to map their employee benefits against the actual legal obligations under Saudi labour, insurance, and sector-specific regulations to determine which benefits are mandated and which are discretionary.

The hospitality block was amended in a way that benefits some employers. The original Article 50 blocked Input Tax on catering in hotels, restaurants, and similar venues without exception. The April 2025 amendment creates a new exception:

New exception: Hospitality, food, and beverage catering services are now recoverable where the taxable person is legally obligated to provide meals to employees at the workplace under applicable KSA law.

Businesses operating in sectors where providing meals to on-site workers is a legal requirement — for example, certain remote site operations or sectors governed by specific labour regulations — may now be able to recover Input Tax on those meal costs that was previously blocked. The same principle applies: the obligation must be a legal one, not a commercial or contractual choice.

The definition of Restricted Motor Vehicle was fundamentally changed from a subjective availability test to an objective capacity test:

Practical Impact of the New Definition

The shift to a passenger capacity test removes the previous ambiguity around “private availability.” Under the new rules, any vehicle carrying 10 or fewer people is presumptively restricted — regardless of how it is used in practice — unless it falls within one of the explicit exceptions. Businesses that were previously recovering Input Tax on vehicles by arguing they were exclusively for business use, without meeting the strict conditions, are now in a more exposed position.

Conversely, businesses with heavy equipment fleets — construction companies, logistics operators — benefit from the explicit exclusion of trucks and cranes from the definition, removing any prior uncertainty about those vehicles.

The April 2025 amendments also introduced a new joint liability provision relevant to Input Tax — Article 47(5). Where a business assigns its activity to another party in a way that results in complete cessation (but the transfer-of-going-concern exemption under Article 17 does not apply), and the assignment is not notified to ZATCA within 30 days, both the assignor and the assignee are jointly liable for any tax and fines that arose before the assignment date.

This has direct Input Tax implications: if the assignee is taking on a business that has historic Input Tax over-recovery positions, it may inherit exposure for those pre-assignment amounts if the notification requirement is not met.

• Review all employee benefit VAT recovery positions — identify which benefits are legally mandated and which are discretionary
• Cease recovering Input Tax on non-mandated healthcare and insurance costs from the amendment’s effective date
• Reclassify your vehicle fleet against the new 10-person capacity test — update your VAT recovery treatment for any vehicles newly or previously classified as restricted
• Review whether any vehicles previously treated as restricted now qualify under the heavy equipment or exclusive business use exceptions
• Assess whether any pending activity assignments require ZATCA notification within 30 days
• Consider whether a voluntary correction to ZATCA is appropriate if Input Tax was incorrectly recovered on healthcare or insurance costs after the amendment effective date