VAT or value-added tax is an indirect tax that the government of the UAE collects on goods and services at each step of the supply chain. This tax was introduced in the UAE in January 2018 at a fixed rate and with some exemptions. This tax is called an indirect tax as it is not directly collected by the government from the taxpayer.
It is the supplier of goods and services who invoices the VAT and then collects it from the consumer. The supplier will then report and submit the taxable income to the tax authorities.
As a business operating in the UAE, it is imperative that you familiarize yourself with every aspect of VAT to make sure you file your returns timely and accurately. To facilitate that, this blog lists some of the most common FAQs that most people have about VAT in the UAE.
These FAQs will help you carry out your VAT duties and show full compliance in the UAE, so keep on reading till the end.
What is VAT?
VAT, or value-added tax, is a tax levied on goods and services at all stages of the supply chain from production to distribution. This tax was introduced in the UAE in January 2018.
This tax is ultimately paid by the consumer, and the businesses act as intermediaries who add this tax to the cost of the product and then collect and pay it to the Federal Tax Authority (FTA).
What are the VAT Rates?
The FTA has specified a fixed VAT rate of 5% for goods and services that are sold in the UAE. This standard rate is applicable to all goods and services that do not belong to the zero-rated or VAT-exempt categories.
Who is a Taxable Person?
Any person, i.e., natural, legal, or corporate entity that conducts business in the UAE and generates income that exceeds a threshold of AED 375,000 annually, is considered a taxable person under the VAT Decree-Law No. 8 of 2017. Under this law, such persons or entities must register for VAT to avoid legal or financial issues.
What are Taxable Supplies?
These are all goods and services that don’t belong to the exempt or Zero-rated supply categories. The general VAT rate for these supplies is 5%. This means if a supplier sells an item that costs him 100 AED, he must add 5% VAT to it. This will bring the total cost of the item to AED 105 that the consumer will have to pay in this case.
What are the Limits for Mandatory and Voluntary VAT Registration?
There are two main types of VAT registration in the UAE, i.e., Mandatory and Voluntary registration. Both of these types have different minimum annual income thresholds.
All businesses whose taxable supplies exceed the limit of AED 375,000 in the last year, or they expect them to increase this threshold in the next 30 days, must mandatorily register for VAT within the preceding 12 months.
Those businesses whose taxable supplies are less than AED 375,000 but more than AED 187,500 can voluntarily register for VAT. This registration is advantageous for such businesses as it allows them to claim input VAT.
How Does the Government Collect VAT?
It is the job of every business that makes taxable supplies to record their business expenses, revenue, and the VAT charges they collect from the consumer on each product. A business pays VAT to its supplier (input VAT) and then adds this cost to the cost of the product that it then sells to the consumer (output VAT). The difference between the two figures is either reclaimed or paid to the government.
When is a Registered Business Required to File VAT Returns?
Every business that makes taxable supplies and is registered for VAT must file the returns with the FTA on a quarterly basis. According to the law, every business must submit its returns within 28 days from the end of the tax period.
For example, if an entity has to pay VAT returns from January to March, they must file them before the 28th of April.
What is Input and Output VAT?
Input VAT is the VAT that a business pays at the time of purchase of goods or services from its supplier. It is also known as the tax charged by the supplier to the business or consumer on goods sold. Businesses registered for VAT can deduct the amount of VAT paid (input VAT) from the settlement with the tax authorities of the UAE.
On the other hand, Output VAT is the VAT that a tax-registered business calculates and charges on the sales of its own goods and services to its consumers. This tax is charged both to ordinary consumers and businesses on every sale.
How Can Business Owners Calculate Their VAT?
The tax that a business must pay is equal to
VAT TAX = tax collected on output (sales) – tax paid on input (purchases)
Suppose you buy raw materials to make a product for AED 100,000. Now you need to apply the input VAT rate of 5% to this number. 5% of 100,000 is about AED 5000. This is the input tax that you must pay.
Let’s say, after selling the product, you make a total of AED 200,000. Now you need to charge 5% VAT on the sales. The output VAT will be 5% of AED 200,000, i.e., AED 10,000.
Now you can easily find the net VAT using the formula given above.
VAT = AED 10,000 – AED 5,000 = AED 5,000
This is the resulting amount that you will have to report to the Federal Tax Authority (FTA).
Is VAT Applicable to The Real Estate Sector?
VAT is only applicable to this sector in the case of commercial units. All leases, sales, or purchases of commercial properties are subject to standard 5% VAT in the UAE. Residential properties are exempt from VAT, and the Real Estate Developer Businesses are in the zero-rated category for a period of 3 years of residential property construction.
What are Zero-Rated VAT Supplies?
These are supplies on which the VAT is charged at a 0% rate. The supplies from this category are a part of the taxable supplies, which means they are declared in the VAT returns. In this case, businesses can recover their input VAT.
Zero-rated supplies include:
- Basic Educational Services
- Basic Healthcare Services
- Goods and Services Exported Other Than GCC
- Gold, Silver, and Platinum for Investment Purposes
- International Transport of Passengers
- First Sale of New Residential Property within 3 Years from Completion
- Certain supplies in the oil and gas sector are zero-rated, depending on their nature and end use, as per FTA guidelines.
What are VAT Exempt Supplies?
These are supplies for which no output tax is due and no input tax is paid. In other words, this category includes supplies on which no VAT is applicable. The businesses that deal with exempt supplies cannot reclaim input VAT.
These supplies include
- Supply of bare land
- Supply of Local Passenger Transport
- Specified Financial Services, Such as Credit Card Annual Fees, late payment fees, etc.
- Supply of Residential property, except for the first supply within 3 years of its completion
What are the Penalties for VAT Non-Compliance in the UAE?
Failure to register for VAT leads to a fine of AED 20,000. Late submission of the VAT returns will lead to a fine of AED 1,000 for the first offence and AED 2,000 for the second offence. Not maintaining proper records can lead to fines of AED 5,000 to AED 50,000.
Conclusion
Keeping up with your VAT registration, returns, and associated responsibilities is extremely important if you wish to run a successful business in the UAE. Value-added tax is a must for businesses with taxable supplies that exceed the AED 375,000 threshold. Not adhering to VAT laws will result in hefty fines and other penalties, like business license suspension and, in severe cases of fraud, legal prosecution or imprisonment.
To make sure you stay ahead of the VAT laws, you need a trusted financial advisor by your side. You can visit us at HRSG to get the best VAT services and solutions for your business operating in the UAE. Our dedicated team will help you file your VAT returns accurately and on time to ensure minimal disruptions in your operations.
