The UAE has introduced a significant VAT reform for the recycling sector with the implementation of the domestic Reverse Charge Mechanism (RCM) on scrap metal supplies. This change, effective 14 January 2026, is aimed at improving compliance, preventing tax evasion, and enhancing cash flow for businesses operating in the recycling and scrap metal industry.

This article explains the new RCM framework, its applicability, exclusions, compliance obligations, and key VAT refund challenges businesses should be aware of.

Introduction to the New RCM Framework

The Cabinet Decision No. 153 of 2025, issued on 4 November 2025, establishes a new VAT framework under which the VAT liability shifts from the supplier to the recipient for specific domestic transactions involving scrap metal.

Under this mechanism, VAT-registered suppliers will no longer charge VAT on qualifying scrap metal supplies. Instead, VAT-registered recipients will self-account for VAT under the reverse charge mechanism in their VAT returns.

What Qualifies as Scrap Metal?

For the purpose of this decision, scrap metal refers to:

• Waste of ferrous or non-ferrous metals
• Materials that retain commercial value
• Scrap that can be reused after processing, such as:
  • Repair
  • Recycling
  • Other approved industrial processes

Objective of the Domestic Reverse Charge Mechanism

The domestic RCM has been introduced to achieve the following objectives:

• Simplify VAT compliance by shifting reporting responsibility to the recipient
• Prevent VAT fraud through enhanced transparency and control
• Improve cash flow by eliminating upfront VAT payments on qualifying transactions

Sectors Covered Under Domestic RCM in the UAE

The UAE has already applied domestic RCM to several sectors, including:

• Scrap Metals: Effective from 14 January 2026
• Electronic Devices (mobile phones, computers, tablets, and parts): Effective from 30 October 2023
• Precious Metals & Stones: Effective from 1 June 2018
• Crude Oil, Natural Gas, and Hydrocarbons: Effective from 1 January 2018

How the Domestic RCM Works for Scrap Metal

Supplier Treatment

• The VAT-registered supplier does not charge VAT
• Applies only when the recipient:
  • Is VAT-registered in the UAE
  • Intends to resell or use the scrap metal for processing

Recipient Treatment

• The VAT-registered customer accounts for VAT
• VAT is reported under the reverse charge mechanism
• VAT is declared in:
  • Output VAT (Box 3)
  • Input VAT (Box 10), subject to recovery eligibility

Conditions to Apply Domestic RCM

The domestic RCM will apply only if all the following conditions are met:

1. Scope of Supply
   The supply involves scrap metal intended for resale or use in production or manufacturing.
2. VAT Registration
   Both the supplier and the recipient must be VAT-registered in the UAE.
3. Written Declaration
   Before the supply date, the recipient must provide a written declaration confirming:
   • VAT registration status
   • Intended use of scrap metal

If the declaration is not provided, RCM does not apply, and the supplier becomes liable to charge VAT.

Exclusions from Domestic RCM

Certain transactions are excluded from the domestic RCM:

Exports of Scrap Metal

• If zero-rating conditions are met, exports are treated as zero-rated supplies
• No output VAT is payable, but transactions must be reported as zero-rated exports

Supplies in Designated Zones

• Supplies made within or between Designated Zones are treated as outside the scope of VAT, subject to specific conditions

Supplier and Recipient Obligations

Supplier Obligations

• Verify the recipient’s VAT registration with the Federal Tax Authority (FTA)
• Obtain and retain the written declaration
• Issue a tax invoice clearly stating “Reverse Charge Mechanism applies”
• Maintain proper documentation

Recipient Obligations

• Account for VAT under RCM
• Report VAT correctly in the VAT return
• Retain the tax invoice and written declaration
• Ensure accurate VAT reporting to avoid penalties

How Businesses Should Prepare for the New RCM

Businesses involved in scrap metal supplies should proactively prepare by:

• Reviewing existing contracts and clauses
• Updating invoicing and accounting processes
• Verifying VAT registration of counterparties
• Obtaining required written declarations
• Training internal finance and operations teams
• Implementing strong documentation and VAT controls

VAT Refund Challenges in the UAE

Eligibility for VAT Refunds

VAT-registered businesses can claim refunds if input VAT exceeds output VAT in a tax period.

VAT Refund Process

1. File VAT return via the EmaraTax portal
2. Submit VAT refund request if refundable balance arises
3. FTA reviews the request within 20 business days
4. Approved refunds are processed within 5 business days

Key Legislative Updates Impacting VAT Refunds (Effective 1 January 2026)

Five-Year Time Limit for Refunds

• Excess recoverable input VAT must be claimed within five years
• Any balance remaining after five years becomes ineligible for refund or offset

Anti-Evasion Measures

The FTA may deny VAT recovery if:

• The taxpayer was aware or should have been aware of tax evasion
• Due diligence was not exercised in verifying supply chains

Refund Application Time Limits

• Refund applications must generally be filed within five years
• Transitional rules allow certain expired claims to be submitted until 1 January 2027

Conditions for VAT Refund Rejection During Audit

The FTA may refuse refunds if:

• Significant tax liabilities are expected
• There is suspicion of tax evasion
• Information is not provided on time
• The taxpayer fails to cooperate during audits
• Outstanding tax returns exist

Current Status of VAT Refund Applications

In several sectors, VAT refund applications remain pending or rejected due to:

• Compliance reviews
• Documentation gaps
• Sector-specific VAT complexities

In many cases, the FTA has initiated tax audits to verify refund claims, and final decisions depend on audit outcomes.

How Professional Support Can Help

Expert VAT advisors can assist businesses with:

• VAT audit support
• Review and restructuring of refund applications
• Managing controversial or rejected refund cases
• Escalation to TDRC or Federal Courts
• Building strategies to minimize refund delays and disputes

Final Takeaway

The introduction of the domestic RCM for scrap metal marks a major shift in VAT compliance for the UAE recycling sector. Businesses must act promptly to align contracts, systems, and documentation with the new requirements to avoid penalties and cash flow disruptions.

Early preparation, strong internal controls, and professional guidance will be key to ensuring smooth compliance and successful VAT recovery under the new framework.

FAQs

1. What is the Reverse Charge Mechanism for scrap metal in the UAE?

The Reverse Charge Mechanism shifts VAT liability from the supplier to the VAT-registered buyer. Instead of charging VAT, the supplier issues an invoice without VAT, and the buyer self-accounts for VAT in their return.

2. When does the UAE scrap metal Reverse Charge Mechanism become effective?

The domestic Reverse Charge Mechanism for scrap metal becomes effective from 14 January 2026, as per Cabinet Decision No. 153 of 2025.

3. Who is required to apply the reverse charge on scrap metal supplies?

Both the supplier and recipient must be VAT-registered in the UAE, and the scrap must be intended for resale or industrial processing. If conditions are met, the recipient accounts for VAT under RCM.

4. Do suppliers charge VAT on scrap metal under RCM?

No. Suppliers must not charge VAT on qualifying transactions. Instead, invoices should state “Reverse Charge Mechanism applies,” and the recipient reports VAT in their VAT return.

5. What documents are required to apply for the domestic RCM?

Suppliers must obtain a written declaration confirming the buyer’s VAT registration and intended use of scrap metal. VAT registration verification and proper tax invoices are also mandatory.

6. Are scrap metal exports covered under the Reverse Charge Mechanism?

No. Exports are generally zero-rated, not subject to RCM, provided zero-rating conditions are satisfied and the transaction is reported correctly in the VAT return.

7. Can businesses claim input VAT under the Reverse Charge Mechanism?

Yes. The recipient reports VAT as both output VAT and input VAT. Input VAT can be recovered in the same return, subject to normal recovery rules and eligibility.