TAT Clarifies VAT Refund Rules: Overpaid Tax and Recovery of VAT Wrongly Charged on Exempt Supplies

The Uganda Tax Appeals Tribunal has delivered an important decision on VAT refunds that settles a critical operational friction point between taxpayers and the Uganda Revenue Authority (URA).

The decision concerns key VAT principles and questions that have not been substantially litigated before in Uganda including: whether a VAT refund application for VAT paid on supplies which were supposed to be exempt, is valid; and whether a taxpayer who was unregistered for VAT purposes and not a VAT taxable person during the period in issue can make such a VAT refund application.

Case Citation: Portman Square Limited v Uganda Revenue Authority, TAT Application No. 179 of 2025.

The dispute centered on a Shs. 4,064,860,158 VAT refund claim arising from tax mistakenly charged by suppliers on VAT exempt hotel construction services and materials towards the Four Points by Sheraton hotel project situated in Kololo, Kampala.

The Tribunal’s view is that where VAT is wrongly charged on supplies which are legally exempt, the taxpayer is not necessarily making an ordinary input VAT claim. The taxpayer may instead be pursuing recovery of tax which was never lawfully due in the first place.

The decision is significant because it goes beyond ordinary input VAT recovery and establishes a broader overpaid tax / VAT paid in error route for recovery where VAT was wrongly charged on exempt supplies and paid by a taxpayer who was not on the VAT register.

The Tribunal held that VAT charged and paid on supplies which were exempt under the law was not lawfully chargeable, and therefore constituted tax paid in error or overpaid tax, refundable. 

Once that conclusion was reached, the taxpayer’s claim against URA was no longer an ordinary input VAT claim but a claim for recovery of tax paid in error.

The tribunal noted that the taxpayer was not claiming ordinary input tax credit arising from taxable supplies. It was claiming recovery of VAT paid in error on supplies which were exempt and therefore not legally taxable.

That distinction matters because input VAT recovery is tied to the VAT Act provisions relating to VAT registration, taxable activity and the VAT credit mechanism. A refund of tax paid in error, however, is governed by the broader overpayment framework under the Tax Procedures Code Act.

VAT unlawfully charged on exempt supplies is not “input tax”; it is tax not legally due

The decision clarifies that where a supply is exempt, VAT should not arise at all.

If VAT is nevertheless charged, the amount does not become valid input tax merely because it appears on a tax invoice. It remains an amount charged contrary to the VAT Act.

This is commercially significant because taxpayers often assume that once a tax invoice has been issued showing VAT, the only route is input tax recovery.

The Tribunal’s reasoning suggests that the correct route depends on the legal character of the supply.

If the supply is taxable, the ordinary input VAT rules may be relevant. If the supply is exempt, the VAT was never properly chargeable in the first place. In that case, the better analysis is that the taxpayer paid tax in error.

This distinction is likely to matter in sectors where exemptions, incentives and special VAT treatments apply, including real estate, tourism, infrastructure, donor-funded projects and investment promotion arrangements.

For taxpayers and their advisers, this is the most important takeaway: not every VAT refund claim is an input VAT claim. Where VAT was never lawfully chargeable in the first place, the correct route may be recovery of overpaid tax.

Exempt supply treatment under the law must be respected commercially and administratively

The ruling reinforces the objective purpose of strategic fiscal incentives enacted by Parliament. The relevant provisions of the VAT Act were specifically designed to attract large-scale capital into the tourism and hospitality sectors by eliminating the VAT drag on massive infrastructure outlays. 

The ruling preserves the economic integrity of these incentives against erosion by aggressive or erroneous tax collection practices.

The relevant supplies included services for feasibility study, design and construction, and locally produced construction materials for qualifying hotel or tourism facility developers meeting the statutory investment and room-capacity thresholds.

Why the decision matters:

This decision matters for more than hotel developers.

It is likely to affect taxpayers dealing with exempt supplies, incentive regimes, construction exemptions, donor-funded projects, public infrastructure arrangements, investment incentives and complex supply chains where VAT is wrongly charged at invoice level in large high stakes transactions.

The ruling clarifies that VAT refund analysis should begin with the legal character of the supply.

The first question is not merely whether the taxpayer was registered for VAT but whether the VAT was lawfully chargeable at all, and moves the refund process away from the narrow input VAT refunds framework and into a broader legality-based refund framework which covers refunds of overpaid tax or tax paid in error generally.

Where the supply was exempt and VAT was wrongly charged, the taxpayer should therefore consider whether the correct route is a refund of tax paid in error under the Tax Procedures Code Act.

For developers and contractors, the case is a reminder that VAT treatment of transactions should be taken into account at the point of contracting and invoicing to rule out a possibility of meeting tax burdens that should ordinarily not be due.

Sixth, credit notes are not necessarily the exclusive correction mechanism where VAT was unlawfully charged on exempt supplies.

Seventh, URA cannot retain tax paid in error merely because it entered the tax system through a supplier if the tax is not levied at law.

The decision should, however, be applied carefully in tax planning, as it is a Tribunal-level decision and may be subject to appeal to the High Court.