Blocked Input Tax: Entertainment, Motor Vehicles, and Employee Benefits

Not every business cost qualifies for Input VAT recovery. Article 50 of the VAT Implementing Regulations identifies categories of expenditure where the Input Tax is permanently blocked — and the April 2025 amendments expanded that list significantly.

These are not partial restrictions or apportionment situations. Blocked Input Tax is irrecoverable, full stop. No matter how genuine the business purpose, no matter how well-documented the invoice — if the expenditure falls within a blocked category, the Input Tax cannot be deducted. The law treats these purchases as if they were made outside of economic activity entirely.

Understanding exactly what is blocked — and what the exceptions are — is one of the highest-value compliance exercises a VAT-registered business in Saudi Arabia can undertake.

The philosophical basis for blocking Input Tax on certain categories is that the expenditure either has an inherently personal or non-business character, or creates a significant risk of private benefit to individuals — employees, directors, or their families. The VAT system is designed to tax final consumption; allowing full Input Tax recovery on entertainment or personal vehicles would effectively subsidise consumption through the VAT system.

The GCC VAT Agreement authorises each member state to determine categories of Input Tax that cannot be deducted where the expenditure is for purposes other than economic activities. Saudi Arabia has implemented this through Article 50, with the April 2025 amendments updating the list to address areas that had been generating compliance uncertainty.

The April 2025 amendments fundamentally redefined what constitutes a Restricted Motor Vehicle — and the new definition is more practical and objective than what preceded it.

New definition: A Restricted Motor Vehicle is any vehicle designed to transport 10 persons or fewer. This replaces the previous definition which turned on whether the vehicle was available for private use — a test that was harder to apply in practice and generated frequent disputes.

What Is Now Explicitly Excluded from the Definition

The following vehicle types are not Restricted Motor Vehicles and therefore do not trigger the input tax block:

• Trucks, cranes, and similar heavy equipment used exclusively for economic activity and not available for private use
• Vehicles purchased or rented for resupply — i.e. dealers, rental companies, or fleet operators selling/leasing vehicles as their taxable activity
• Vehicles registered as emergency vehicles — ambulances, fire trucks, security and guard vehicles
• Vehicles used exclusively for economic activity purposes with no availability for private use

This is the most impactful change in the April 2025 amendments for most large employers. Healthcare services and insurance provided to employees and their dependants are now explicitly blocked — meaning Input Tax on group health insurance premiums, medical centre fees, and employee healthcare costs cannot be recovered.

The exception is narrow: if the employer is legally obligated to provide the benefit under applicable KSA law, the block does not apply. This means businesses need to assess their healthcare and insurance obligations under Saudi labour and insurance regulations carefully. Where there is a legal mandate, the Input Tax remains recoverable. Where benefits are provided voluntarily or above the legally required standard, the Input Tax on the excess is blocked.

Across all blocked categories, there is a consistent and important exception: if the blocked expenditure is purchased for the purpose of direct resupply as a taxable supply, the input tax block does not apply.

This makes sense. A hotel that purchases food and beverage items for its restaurant is purchasing a blocked category — but it then resupplies that catering as a taxable service to its guests. The hotel is in the business of providing hospitality; it is not consuming the catering for its own internal purposes. Similarly, an entertainment company purchasing event tickets for resale to corporate clients is making a taxable supply of those tickets — the Input Tax is recoverable.

The exception is narrow: it requires a direct resupply. Buying client entertainment as a cost of maintaining relationships — rather than as something you sell — does not qualify.

• Recovering Input Tax on group health insurance post-April 2025. The most pressing issue for most large Saudi employers. Unless legally mandated, this is now blocked.
• Incorrectly classifying vehicle use. The 10-person capacity test is objective, but businesses may still attempt to argue that certain vehicles are excluded under the “exclusively for business” exception — without adequate evidence of exclusive use.
• Claiming entertainment costs as “business development.” Labelling entertainment as client meetings or business development does not remove it from the blocked category. The nature of the expenditure controls, not the internal description.
• Applying the resupply exception too broadly. The exception requires direct, taxable resupply. Incidental benefit to customers — for example, complimentary refreshments at a meeting — does not constitute a taxable resupply.