VAT in the UAE: 10 things to know ahead of its implementation

The UAE is all set to implement value added tax (VAT) from January 2018, and businesses in the first phase can start now registering on the website of the Federal Tax Authority (FTA).

Ahead of registration, the FTA has revealed a list of the top 10 things businesses must know before registering for VAT. The list covers frequently asked questions (FAQs) regarding the tax in order to raise awareness and facilitate a smooth rollout of the VAT system.

The imposition of VAT is anticipated to provide a big boost to the UAE, and is expected to generate approximately Dhs12bn in its first year of introduction.

1. What is VAT?

VAT is an indirect tax imposed on the supply of most goods and services. It is one of the most common types of consumption taxes found around the world. More than 150 countries have implemented VAT (or its equivalent, Goods and Services Tax- GST), including all 29 EU member states, as well as Canada, New Zealand, Australia, Singapore and Malaysia.

VAT is charged at each step of the supply chain. In general, it is the consumers that ultimately bear the VAT costs, while businesses collect and account for the tax. In effect, businesses will be collecting the tax on behalf of the government.

Businesses pay the government the tax that they collect from consumers. In some cases, they may reclaim from the government the VAT they had paid to suppliers. Thus, the net result of tax revenues received by the government is tax on that “value added” throughout all stages of the supply chain.

2. Why is the UAE implementing VAT?

The UAE provides its citizens and residents with various public services, including hospitals, roads, public schools, parks and civil services. These services are paid for by the government. Therefore, VAT will provide the country with a new source of income. It will also help the government achieve its vision of reducing dependence on oil and building a sustainable knowledge economy for the future.

3. What is the VAT rate and which sectors are subject to VAT?

The VAT rate in the UAE is fixed at 5 per cent and is levied on the supply of all goods and services, including food, commercial buildings and hotel services, if no explicit provision is made to impose a zero rate or an exemption.

The zero rate is imposed on some goods and services, including health and education services, the supply of investment gold, the first supply of residential buildings, and the supply of international transport of passengers and goods, and exports.

Activities exempt from tax include bare land, local transportation of passengers, supply of residential buildings and the supply of some financial services.

4. What is the difference between exempt supplies and zero-rated supplies?

Businesses that supply goods or services that are subject to a zero rate are required to register for VAT, but can recover the VAT that they incurred on their purchases. Meanwhile, businesses that supply exempt goods or services cannot recover the VAT they incurred on their purchases.

Also read: UAE’s finance ministry yet to fix VAT rate on goods, services

5. What is the mandatory registration limit and the voluntary registration limit?

A business must register for VAT if its taxable supplies and imports exceeds the mandatory registration threshold of Dhs375,000. A company may also choose to register for VAT voluntarily if its supplies and imports are below the mandatory registration threshold, but above the voluntary registration threshold of Dhs187,500.

A business may also register voluntarily if its expenses exceed the voluntary registration threshold.

The voluntary registration option is designed to enable start-up businesses with no turnover yet to register for VAT.

6. Are there specific dates for businesses to register for VAT?

All businesses must submit an application for registration as soon as possible, in order to avoid the risk of non-registration by January 1, 2018, which would entail fines as stipulated in Cabinet Decision No. (40) of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE.

7. How to register for VAT?

Tax registration can be done through the Federal Tax Authority’s website. The registration portal is available 24 hours a day, seven days a week.

8. Will there be tax grouping?

Businesses that satisfy certain requirements covered under the legislation (such as having a place of residence in the UAE and being related/associated parties) will be able to register as a tax group. For some businesses, tax grouping will be a useful tool that would simplify accounting for VAT.

9. Can businesses begin charging VAT before January 1, 2018?

Businesses are prohibited from imposing VAT on any goods or services before January 1, 2018.

10. What are the records that need to be retained?

All businesses – registered and unregistered – must retain records such as balance sheet, profit and loss, and records pertaining to fixed assets, payroll, inventory and stock levels, as well as accounting records (payments, receipts, purchases, sales, revenues and expenses).

Businesses may be required to make changes to their core operations, financial management practices, the procedures they use to keep accounting books and records, and the technology they use in their accounting practices, in addition to changes in their human resources (accountants, tax advisers, etc.)

All communication with the FTA can be done online via its website.

Also read: VAT to create over 5,000 jobs in the GCC – analyst