Value Added Tax (VAT)

Value Added Tax (or VAT) is an indirect tax. Occasionally, it might be referred to as a type of general consumption tax. In a country which has a VAT, 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 the government reflect the “value add” throughout the supply chain. Below is a simple, illustrative example explaining how VAT works (based on a VAT rate of 5%):

VAT implementation in the UAE

The UAE Federal and Emirate governments provide citizens and residents with many different public services – including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for using government budgets. VAT provides our country with a new source of income, contributing to the continued provision of high quality public services in the future. It also helps the government move towards its vision of reducing dependence on income derived from oil and other hydrocarbons. VAT was introduced across the UAE on 1st January 2018 at a standard rate of 5%.

VAT implementation in coordination with other GCC countries

The UAE is part of a group of countries which are closely connected through “The Economic Agreement between the GCC States” and “The GCC Customs Union”. The GCC group of nations have historically worked together in designing and implementing new public policies as we recognise that such a collaborative approach is best for the region.

VAT for Businesses
Registering for VAT

A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.

Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.

Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.

VAT-related responsibilities of businesses

All businesses in the UAE 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) are required to register for VAT. Businesses that do not think they should be VAT-registered should maintain their financial records in any event, in case we 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 are 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.

VAT in real estate

The VAT treatment of real estate depends on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties are taxable at the standard VAT rate (i.e. 5%).

On the other hand, supplies of residential properties are generally exempt from VAT. This ensures that VAT does not constitute an irrecoverable cost to those who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within three years of completion at the time of VAT introduction is zero-rated.

Zero-rated sectors

VAT will be charged at 0% in respect of the following main categories of supplies:

Exports of goods and services to outside the GCC

International transportation, and related supplies

Supplies of certain sea, air and land means of transportation (such as aircrafts and ships

Certain investment grade precious metals (e.g. gold, silver, of 99% purity)

Newly constructed residential properties, that are supplied for the first time within three years of their construction

Supply of certain education services, and supply of relevant goods and services

Supply of certain healthcare services, and supply of relevant goods and services

VAT- exempt sectors

The following categories of supplies will be exempt from VAT:

The supply of some financial services (clarified in VAT legislation)

Residential properties

Bare land

Local passenger transport

Partial exemption

Where a VAT registered person incurs input tax on its business expenses, this input tax can be recovered in full if it relates to a taxable supply made, or intended to be made, by the registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt supplies), the registered person may not recover the input tax paid.

In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable (exempt) supplies.

Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.

Government Entities and VAT purposes

Supplies made by government entities are typically subject to VAT. This ensures that government entities are not unfairly advantaged as compared to private businesses.

Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. Certain government entities are entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.

For the supplies provided for government entities, the treatment of such supplies depends on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment will remain the same even if it is provided to a government entity.

All the companies in the UAE should submit their application to register for VAT before the deadline once the company’s turnover meets the registration threshold. UAE imposed VAT of 5% and categorised supplies in to several buckers i.e. Standard rated sales, Zero rated Sales, Exempt supplies and so on…UAE generates an income from the VAT imposed and further used to be providing and enhancing public services.

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