8 Things You Didn’t Know About VAT In UAE

Value added tax (VAT) in UAE was implemented on 1st January 2018 to diversify the income resources and boost the economy. VAT consultancy quickly became the most sought-after service in the country. Companies started seeking the help of tax specialists to ensure they transition smoothly to the new tax system.

While the first day of VAT was met with confusion, people and businesses now have a basic understanding of how it works.

However, there are a few things businesses need to know in order to ensure compliance and implement best practices in their organizations. Here is a rundown of the 8 things you probably didn’t know about VAT in UAE.

1. PRICE HIKES COULD LAND YOU IN HOT WATER

Reports started to emerge in January that many companies were hiking the prices of their products and services. For example, some retailers raised the prices of their goods by 5%, in addition to the 5% VAT.

The Department of Economic Development proactively penalised companies engaging in such practices, and consumers are encouraged to report them. Your business should have a clear pricing structure that makes sense to the consumer. Increasing the prices of your goods without explanation can cause you to lose customers and may even land you in trouble.

2. YOUR BUSINESS CAN GET VAT EXEMPTIONS

This is important information for companies that want to set up their business in UAE. So far, there are three VAT categories; standard (5%), zero-rate and exempt. Companies registered as zero-rated can reclaim their VAT contribution for the goods and services they provide.

Companies that are exempt are either not registered for VAT, or cannot reclaim the VAT contribution. If you plan to start a free zone company, please note that you will be liable to pay VAT on the purchase of goods and services from outside the free zone.

3. VAT ON HOSPITALITY AND ENTERTAINMENT IS NON-RECOVERABLE

Should you get VAT recovery on entertaining guests at your business event? Article 53 of the tax law can be confusing for many businesses, so it’s normal to seek clarification on what is considered a business expense and what constitutes as entertainment.

Basically, VAT incurred on genuine business expenses is recoverable, such as food and beverages provided at a business meeting. However, if entertainment or hospitality is the purpose of a meeting, event, or gathering, VAT cannot be recovered.

4. SECOND-HAND GOODS SUBJECT TO VAT CAN BE SUBJECT TO A PROFIT MARGIN SCHEME

According to the Federal Tax Authority (FTA), second-hand goods which had previously been subjected to VAT can be considered eligible goods under the profit margin scheme. VAT is applicable on the full sales price of all goods that were purchased before VAT implementation.

Businesses that deal in second-hand goods should be careful when recording the sales of eligible and non-eligible items as it can impact their books of accounts. Items should be segregated based on eligibility to eliminate errors when filing for VAT recovery.

5. MAINTAIN ACCOUNTS AND RECORDS FOR AT LEAST 5 YEARS

According to the law, you are required to retain accounting and bookkeeping records for 5 years after the end of the tax period. These include records of imports, exports, tax credit notes, tax invoices, outward supplies, and more.

So if a tax invoice is issued on 20th January 2018, it belongs to the tax period January – December 2018. This means the invoice should be retained till 31st December 2023. Records for capital assets should be retained for 10 years while records for real estate should be retained for 15 years minimum from the end of the tax period.

6. VAT TO REMAIN THE SAME

When it was announced that VAT will be introduced at 5% from 2018 onwards, many businesses and consumers feared that the rate will increase over time. Despite initial fears, the UAE government has shown no indication of increasing the VAT anytime soon. Additionally, at 5%, UAE has one of the lowest VAT rates in the world.

While businesses can reclaim VAT, their major concern is how it affects the buying power of the consumer. With the VAT remaining constant, businesses, especially in the service industry, can keep their prices competitive and benefit from consumer retention.

7. TOURISTS CAN NOW GET A VAT REFUND

Starting Q4 of 2018, non-resident tourists can get a VAT refund on purchases they make from participating retailers, provided that the goods they purchase are not tax exempt. This is a good move by the government as the tourism sector is one of the largest contributors to the economy.

In fact, 11.3% of the GDP came from tourism in 2017, amounting to AED 154.1 billion. While this rule does not affect businesses directly, it can help VAT-registered retail and service companies to better market and sell their products to tourists.

8. YOU CAN SEEK VAT CONSULTANCY

Despite VAT being new, there are certified tax specialists in the UAE who can help you manage your accounts and books for compliance. Our team of certified tax specialists can assist you in properly recording and filing VAT to avoid penalties associated with noncompliance.

We are here to help you identify the challenges your business faces with VAT and guide you in overcoming these challenges. Get in touch with us today to get VAT consultancy and ensure you are doing business legally and lawfully in the UAE.

For more information on these services, please contact us: