What is VAT?
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is one of the most common types of consumption tax found around the world. Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while Businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain. To explain how VAT works we have provided a simple, illustrative example below (based on a VAT rate of 5%):
When will the VAT go into effect and what will be the rates?
VAT will be introduced accross the UAE on January 1 2018. The rate will be low and is likely to be 5%.
Does it apply to me?
If your business has revenue of more than AED375.000 in the last 12 months you will need to register for VAT in Q4 of 2017. If you have revenue or expenses of AED187500 you CAN register for VAT from Q3 2017.
Why would I register for VAT if I dont have to?
If you are not registered then you can not claim back VAT on your purchases. YOur customers will not be able to set off any claims against their VAT on sales since you havent charged any VAT.
How will the government collect VAT?
The system will be an online system which a company signs up to. The money that is to be paid or refunded will be done online.
Will VAT cover all products and services?
VAT, as a general consumption tax, will apply to the majority of transactions in goods and services. A limited number of reliefs that are currently not VAT applicable are items such as education and healthcare. These industries are deemed as 0 rated which means you still need to file and do VAT returns, you can also claim VAT back on your purchases.
I don't formally have a company. What do I do?
Running an operation without a license in the UAE is not legal and therefore you will need to set one up. VAPC can put you in touch with the right people to get you started.
What are the biggest impact from VAT? Wont everything that is paid from customer just go back to the government?
Yes, thats true- but you will also be purchasing goods that have applied VAT which you can deduct. An important note here is that because VAT is not yet applicable for all. Your suppliers may not apply VAT yet which can result in zero refund at your end and possibly impacting cash flows and margins? You may for example have reported the income and not yet been paid so you will need to pay the government before you actually have even gotten the money.
I buy items from overseas that I than sell to customers in UAE and to other countries in the GCC.
Import is what they call Zero rated. If there was no VAT on import than all suppliers would just import rather than buying locally.
My current systems don't have VAT registered or any VAT buttons. What do I do?
We are sure they do as most systems and accounting software does. We can assist you in implementing this or putting you in touch with advanced software programmers to do this.
How do I account for the VAT on my balance sheet?
VAT will impact your liabilities and assets as you will either owe the government the tax (that you have received on your sales) or they will owe you money back (if you have purchased more from your suppliers). Your bank balance will be impacted when payments are made.
What other implications may this have?
If you are a small business owner that doesnt do your accounting other than excel now is the time to start putting your books in order. Tax audits may happen where you will need to provide supporting docuements such as general ledger, annual accounts, purchase day book, invoices issued and received etc. Excel does not suffice as accounting documentation.
What are the VAT-related responsibilities of businesses?
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 we 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.
What does a business need to do to prepare for VAT?
Concerned businesses will have time to prepare before VAT will come into effect. During that time, businesses will need to meet requirements to fulfil their tax obligations. Businesses could 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. We will provide businesses with guidance on how to fully comply with VAT once the legislation is issued. The final responsibility and accountability to comply with law is on the business.
When are businesses supposed to start registering for VAT?
Registration for VAT is expected to be made available to businesses Q3 2017.
How often are registered businesses required to file VAT returns?
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. The three month period will be given to you and may not reconcile with your calendar year quarters. Registered businesses will be able to file their returns online using eServices.
What kind of records are businesses required to maintain, and for how long?
Businesses will be required to keep records for as long as five years Supporting documents include invoices, purchase orders and . Excel documents are not eligible as supporting documents.
What are the penalties for not complying with a business’s VAT responsibilities?
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.