What is VAT?
Value Added Tax (or VAT) is an indirect tax. It is imposed on most supplies of goods and services that are bought and sold.
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 is likely to be introduced across the UAE on January 1 2018. The rate will be low and is likely to be 5%.
How will the government collect VAT?
Businesses will be responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders will charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
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 may be granted.
Will all businesses need to register with the government for VAT?
In simple terms, only businesses that meet a certain minimum annual turnover requirement will have to register for VAT. That is, many small businesses will not need to register for VAT. Government has made this decision to safeguard small businesses from the extensive documentation and reporting that a system like VAT requires. Also, businesses may not need to register with the government if they only provide goods and services which are not subject to VAT.
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 Government 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, Government 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. Government 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 that meet the requirements criteria three months before the launch of VAT.
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.
What kind of records are businesses required to maintain, and for how long?
Businesses will be required to keep records which will enable the authorities to identify the details of the business activities and review transactions.
Will tourists also pay VAT?
Yes, tourists are a significant source of revenue for the UAE and will pay VAT at the point of sale. Nevertheless, government has set the VAT rate deliberately low so that VAT is a limited burden on all consumers.
Will visiting businesses be able to reclaim VAT?
It is intended that government will allow foreign businesses to recover the VAT they incur when visiting the UAE. This is important as it encourages them to do business and also, because a lot of other countries have VAT systems, it protects the ability of UAE businesses to recover VAT when visiting other countries (where the rates are a lot higher).