An Introduction to VAT

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”.

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.

   2. 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.

   3. 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.