As part of the stabilization strategy, the UAE witnessed new regulatory changes in 2018, the introduction of Value Added Tax (VAT). Such taxation reforms and rapid technological transformations initially disrupted business models and came as a massive challenge for many organizations.
Before 2018, the UAE boasted the simplest taxation systems around the globe. However, the UAE as part of the GCC VAT treaty, and ever since the oil industry saw a steep fall in prices, the UAE reduced their reliance on oil-generated revenue and instead shifted towards tax revenue as their new source of income.
Having entered the year 2020 marks two years since the introduction of VAT regulations, yet many companies are still struggling with hasty registration processes and vague taxation law guidance. For that reason, let’s understand what VAT is and how it might impact your organization.
What are the different types of supply under VAT?
There are two main broad categories of supplies and services under VAT:
Taxable supply – Taxable supply and services are further broken down into standard rated supply and zero-rated supply.
The Standard rate on taxable supplies and services has been set at 5% by tax authorities.
Supplies and services that fall under this category are as follows:
The Zero-rated supply can be any taxable supply to which VAT is applicable at the rate of 0%. Registered business owners will need to report such supplies as tax input while filing tax returns; however, the impact will be nil.
The Zero-rated tax applies to exports of supplies outside the GCC region. The underlying intent is to encourage the exports of goods and to flourish this critical area of business in the UAE.
Some examples of zero-rated supplies are as follows:
Exempt supply – There are specific categories of supplies and services upon which VAT is not applicable. Hence a registered company cannot claim exempt input tax recovery.
Exempt supplies aim to promote growth in specific areas of trade.
Below mentioned supplies and services are exempt supplies:
In addition to the above VAT rates, certain supplies and services are beyond the scope of UAE VAT either by the territory of supply or nature of the transaction. These are known as out of scope supply.
VAT Registration applicability
If you have recently established your company or have been in business for a while, then you should consider the VAT registration applicability of your organization. The registration of any entity depends on a VAT registration threshold set by FTA that applies to all UAE-resident companies:
- A mandatory registration becomes applicable to your business if the taxable supplies and services exceed the limit of AED 375,000.
- A voluntary registration arises in situations where businesses choose to register for VAT voluntarily. However, the entity’s taxable supplies and imports should exceed the voluntary registration threshold of AED 187,500 to qualify for this category.
- A start-up business with no turnover may choose to register voluntarily if their expenses exceed the voluntary threshold.
VAT registration in the UAE
You may register your company for VAT by visiting FTA’s website and create an account. Once your email is verified, you may log in to complete the registration process online. If you have all the documents readily available, then the VAT registration would not take much time. However, in case the set of documents are incomplete, then you may save the application form and come back to it anytime later.
How to prepare your company post VAT registration?
Once you have registered your company for VAT, the structure of your business will transform accordingly. It is important to prepare your entity to deal with VAT implementation effectively.
Update your invoices – After the issuance of TRN, you have to update your invoice accordingly. No more simple invoices! Your company will have to create tax invoices based on the requirement of UAE VAT legislation. You will be required to raise an invoice that displays tax as a separate portion.
Inform your suppliers – Provide your company’s TRN and registration certificate to your suppliers, which they will use as part of their compliance requirements.
Also, at the time of filing tax returns, you will need to keep the complete record of all the VAT you pay on taxable business purchases.
Record-keeping – The taxable person is required by law to maintain requisite records for 15 years. While a non-taxable person can keep the records for five years, below are the set of documents required by FTA.
- Records related to all supplies of Goods and services
- Tax invoices or alternate evidence that confirms receiving goods or services
- Tax credit notes
- Details of goods and services that have either been disposed of or used for unrelated business purpose
- Records of goods and services purchased with input tax deducted
- Records of exports
- Records of adjustments made to financial statements or accounts
- Capital Asset register which shows input tax incurred on the assets along with any adjustments made
The above list is not exhaustive and includes the most common documentation.
Filing VAT returns
A registered entity has to file VAT returns according to the VAT filing calendar assigned to them. For some, filing happens every month while for others every quarter.
You may file your returns online on FTA’s portal, where you will be required to complete the form by filling the relevant details. Make sure you review the filled-out information carefully before submitting it.
How has VAT impacted the businesses?
Undoubtedly, VAT rules have raised a lot of new challenges for businesses in the UAE. Registered companies now have an extra function to perform, which comes with unavoidable admin and compliance costs. To comply with VAT laws and do quarterly VAT reporting, the internal IT systems have been updated accordingly for the majority of the companies. While smaller, labor-intensive businesses are manually managing VAT compliance.
VAT registered entities are accountable for submitting VAT returns along with relevant records to the government promptly. The tax authorities can ask you for any document or information that may include financial statements, invoices issued and received, general ledgers and various other records. Hence, companies have started establishing a robust system and record-maintaining policy that keeps them prepared for any unforeseen tax notices from the government.
The rates of tax aren’t set in stone and many UAE based companies are concerned with a possible rise in VAT rates in the future. It’s not just the 5% rate that might increase, but perhaps zero-rated products would also see an increase.
XB4 is one of the leading and reliable VAT consultancies in the UAE. We at XB4 specialize in helping businesses remain ahead of the tax requirements within the UAE by offering a full suite of services to address VAT implementation challenges. Our services include:
- Registering businesses for VAT
- Creating VAT implementation strategies
- Identifying, mitigating and preventing tax risks
- Continuous monitoring of new tax developments to address and manage compliance issues
- Conducting VAT awareness training with relevant staff and executives
- Supporting in the submission of timely VAT returns