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Chartered Accountants & VAT Specialists

This document has been prepared to provide a general overview of how VAT works. The information included is based on International knowledge and experience of VAT.

The proposed introduction of VAT in UAE will present a number of challenges for businesses operating in the UAE as VAT will impact all part of your business.

A well planned and executed VAT implementation will result in benefits for the business in respect of on-going compliance and management of risks, as well as, cash flow management.

We hope you will find this useful. Should you require any further information or have any questions on VAT we are happy to assist. Contact Us

What is VAT?

Value added tax is a tax levied by the UAE government on sales of goods and services. All businesses which exceeds the registration threshold, normally based on annual turnover which is yet to be decided by the UAE tax authorities must register for VAT and complete a VAT return.

When is VAT going to be implemented in the UAE?

The expected date of VAT implementation in the UAE is 1 January 2018.

How much is VAT?

Supplies of Goods and Services can either be:

  • Standard rate:5%
  • Zero rate:0%

These are called “Taxable Supplies”.

Examples of Standard rated Taxable supplies are most goods and services including vehicles, clothing, business consumables etc. On these goods VAT is charged at 5% on sales and any VAT paid on purchases can be adjusted against the net payment to tax authorities

Examples of Zero rated Taxable supplies are basic food items, essential medicines, export of goods and international services. On these goods VAT is charged at 0% on sales and all VAT paid on purchases can be reclaimed back from the tax authorities in form of a Refund.

There will be certain goods and services which are not subject to VAT. These are called “Exempt Supplies”. On these goods and services no VAT is charged on sales nor any VAT paid on purchases can be claimed back.

Examples of Exempt supplies are healthcare, insurance, financial services, sales and lease of residential properties, and domestic public transportation.

How Does VAT works?

Although VAT will apply to most goods and services there are some likely exemptions like: basic food items, essential medicine and export of goods and international services which are expected to be zero rated supplies.

Furthermore other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempt from VAT.

VAT will be accounted for as follows:

  • Youpay VAT on the items or services you buy from other business. This is your “Input Tax”.
  • Youcharge VAT on the items or services you sell to other businesses and customers. This is your “Output Tax”.
Sales (Aed) 5% charged on Sales(Aed) VAT recovered on Purchases (Aed) Net VAT

Payable (Aed)

1. Mobile phone manufacturer 100.00 5.00 0.00 5.00
2. Mobile Phone Distributor 140.00 7.00 5.00 2.00
3. Mobile Phone Retailer 160.00 8.00 7.00 1.00
4. Total VAT payable by end Consumer 8.00
  1. The manufacturer sells the components to the distributor and charges 5% VAT on the sales price, which is Aed 5.00, as Output Tax. As the manufacturer has not paid any VAT on purchases and not incurred any Input Tax he has to pay net VAT to the UAE tax authority of Aed 5.00
  2. The distributor has incurred Input Tax of Aed 5.00 on his purchases from the manufacturer and charges Aed 7.00 on sales as output tax to the Retailer. The distributor has net VAT payable of Aed 2.00 the tax authorities (Aed 7.00 Output Tax on Sales – Aed 5.00 Input Tax on Purchases)
  3. The Retailer has incurred Input Tax of Aed 7.00 on his purchases from the Distributor and charges Aed 8.00 on sales as output tax to the end consumer. The distributor has net VAT payable of Aed 1.00 to the tax authorities (Aed 8.00 Output Tax on Sales – Aed 7.00 Input Tax on Purchases)
  4. The end consumer bears the full VAT of Aed 8.00 paid to the UAE tax authorities.
  1. VAT Compliance and PracticalitiesDetailed guidance and legislation concerning VAT has not been released yet by the UAE authorities. As such we outline below an overview of a general underlying VAT compliance requirement. 
    1. Registration for VAT: Businesses and Individuals must register for VAT whose turnover exceeds the mandatory registration threshold set by the UAE tax authorities.

    You can choose to register for VAT (voluntary registration) even if your business turnover is below the registration threshold if you feel that it will benefit your business to do so. In particular, it might be useful not to make it quite so obvious about how small your business is. If you do not charge for VAT then customers will immediately know that your firm’s turnover is below whatever the registration threshold is – if you do charge, your business could be any size. However factors such as various compliance and administration costs must be considered before making such a decision.

    Businesses not registered for VAT cannot charge VAT on Sales and cannot claim any VAT on Purchases.

    1. Once your business is VAT-registered you must do the followings things
    • You must charge VAT – at 5% or 0% – on the goods or services you sell to customers and other businesses.
    • You must pay VAT on the goods and services you buy from other VAT registered businesses.
    • You must file a VAT return with tax authorities periodically i.e. monthly or once every three months (quarterly).
    • Remit any VAT to the tax authorities by a specified date.

    In most jurisdictions, the process of reporting and payment of VAT is through filing a VAT return. VAT registered businesses are required to file a VAT return usually by the end of the calendar month following the end of the reporting period. For e.g. if the reporting period ends on 31 March then the VAT return should be filed by 30 April.

    1. Record keeping in respect of business transactions:
    • VAT Invoices – All VAT registered businesses have to issue VAT invoices. A VAT invoice is a documentary evidence of the sale of goods or services in compliance with the local law.

    A VAT invoice is also a documentary evidence to support Input VAT reclaims. Input VAT can only be claimed by registered businesses only if they hold a valid Purchase Invoice.

    • Debit and/or Credit notes
    • Import and Export Records
  1. Planning in Advance for VAT implementationVAT is not meant to be a cost to business. But if you don’t plan in advance for its implementation and you are not prepared, VAT will be a cost to your business. There is a lot to think about and a lot to do.
    • You should be mapping and classifying all the transactions within your organization; whether these are standard rated, zero rated or exempt.
    • You need to consider how much time is needed for your business to be totally VAT compliant.
    • You need to identify the changes required to your IT systems i.e. whether it is VAT compliant. It is calculating VAT correctly and can produce VAT reports as an when needed.
    • You need to identify staff availability and training to handle VAT related affairs.
    • You need to consider whether you should outsource your VAT filing requirements. You may hire an external VAT expert to handle preparation review and even filing of the VAT returns.
    • You need to consider proper VAT technical advice.
    • You need to identify and ensure that your customers and suppliers are VAT compliant or will be by the time VAT is implemented.
    • You need to consider your ling term rentals and customer or supplier agreements whether these will span over the VAT effective date.
    • The cash flow implications of VAT need to be considered. How quickly can you recover the VAT you’re paying to your suppliers? Whilst for some it might be a cash flow burden, if you structure it efficiently, you can actually gain a cash flow advantage out of this.

    You need to consider the ongoing staff training and compliance to keep up to date with the changes in VAT laws in the future.

How can Best Auditing & Accounting Help?

Best can help businesses by providing them a complete range of services as follows:

  1. Help your business to plan and be ready for VAT implementation
  2. Review and implementation of accounting software which are VAT compliant and best suited to your business
  3. VAT training courses for your staff
  4. VAT registration assistance
  5. VAT compliance and ongoing assurance
  6. Any other accounting, auditing, bookkeeping or financial advisory assistance

Contact Us on ……………….  If you require help.

Frequently Asked Questions?

VAT implementation is 1 January 2018. There is a lot to think about and a lot to do. If you don’t act now and prepare your business for VAT implementation it will prove be too costly at a later stage.

If you decide not to do anything there is a risk that your business will not be VAT compliant by the time it is implemented. This may mean that you will not be able to file a complete and accurate VAT return in time. This may lead to penalties and/or prosecution.

We anticipate that more detailed information will be available in the near future.

All businesses will need to register for VAT that meet a certain minimum annual turnover requirement.  Specific conditions (such as minimum annual turnover) that will help identify businesses that need to register for VAT have not been finalized yet by the UAE tax authorities.

All businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Businesses that do not think that they should be VAT registered should maintain their financial records in any event, in case the UAE tax authorities need to establish whether they should be registered.

VAT-registered businesses generally:

  • must charge VAT on taxable goods or services they supply;
  • may reclaim any VAT they’ve paid on business-related goods or services;
  • Keep a range of business records which will allow the government to check that they have got things right
  • If you’re a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.

If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.

Businesses should plan and prepare before VAT will come into effect. During that time, businesses will need to meet requirements to fulfill their VAT obligations. Businesses should start now so that they will be ready later. To fully comply with VAT, We believe that businesses may need to make some changes to their core operations, their financial management and book-keeping, their technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT now and once the legislation is issued make every effort to align their business model to government reporting and compliance requirements. The final responsibility and accountability to comply with law is on the business.​​

Registration for VAT is expected to be made available to businesses that meet the requirements criteria three months before the launch of VAT. Businesses will be able to register online using e-Services.

Registered businesses will be expected to submit VAT returns on a regular basis. It is expected that the default period for filing VAT returns will be three months for the majority of businesses. Registered businesses will be able to file their returns online using e-Services.

Businesses will be required to keep records which will enable the authorities to identify the details of the business activities and review transactions. The specifics regarding the documents which will be required and the time period for keeping them will be communicated in due course.

Everyone is urged to fully comply with their VAT responsibilities. The government is currently in the process of defining the exact fees and penalties for non-compliance.