The first day of 2018 is remembered by many in the UAE for the wave of anxiety and confusion that spread across the country as Value Added Tax (VAT) launched for the first time. This has been a huge change for all businesses in the region, especially smaller ones.
So three months later, as the dust settles, let’s look at what we have learned in terms of rules, regulations, pitfalls and best practices. And how this can be of use as we move to Q2.
But first, a quick VAT primer.
VAT in 30 seconds
VAT is a tax on consumption. From January 1st, 2018, all companies supplying goods and services in the UAE, and the wider Gulf region, had to register for and charge VAT. In the UAE, the rate is 5%. This is different to a sales tax because it is charged all along the supply chain, so many business-related transactions will be technically subject to this tax even though it is the final consumer that ultimately foots the bill.
However, your business only has to register for VAT in the UAE if its taxable supplies and imports exceed AED 375,000 per annum.
You collect VAT from your customers and pay it directly to the government. At the same time, you can claim back any VAT paid to your suppliers.
While new to the Gulf countries, VAT is very common across the world, and is charged by all counties in the EU, USA, Canada and Australia. In fact, around 130 countries charge it, yet at 5% the UAE rate is one of the lowest in the world. Consumers in Denmark, Hungary, Croatia, Norway and Sweden pay VAT at 25% or more.
In fact, around 130 countries charge it, yet at 5% the UAE rate is one of the lowest in the world. Consumers in Denmark, Hungary, Croatia, Norway and Sweden pay VAT at 25% or more.
Five big VAT lessons for UAE businesses
At 5%, VAT may be comparatively low, but that doesn’t mean the first three months haven’t gone without a hiccup or two. Here’s what we’ve learned and what it means for your business.
1. Deadlines matter: Back in October 2017, the UAE Federal Tax Authority (FTA) set deadlines for VAT registration. In short, all businesses had to be signed up to the online system by December 4th, 2017. Failure to do so would leave the business in violation of the tax law under the Cabinet Resolution Number 40. Despite this, as of late February 2018, reports in the media suggested 90,000 of the required 350,000 companies have yet to do so.
Instead of coming down hard on these organisations, the FTA has chosen to play good cop, offering encouragement instead of punishment. The deadline has been shifted to April 30th, 2018.
Lessons learned – So let’s get the obvious out the way first – if you haven’t registered, then do so before the April deadline. Things will become far less lenient come May when you could be liable for fines. But take note: once you’re VAT-registered you’re required to keep business and accounts records so the government can check you’re abiding by the rules. These need to be maintained for a minimum of five years. If you’re not sure which records you need to keep, please do seek advice from an independent company formation specialist. When it comes to taxation, it really is better to be safe than sorry.
2. Pricing troubles: Not everyone has had it so easy though. By early January 2018 reports started to emerge that some businesses were taking advantage of the 5% tax to hike their prices.
Take retailers as an example. The price we see should be inclusive of the VAT and the receipt should show the breakdown of the tax. However, some consumers took to Twitter to show pictures of receipts that revealed a different story. While 5% had already been included in the price, a further 5% was being added at the checkout.
By February 2018, it was shown that 15 of these such companies had felt the wrath of the Department of Economic Development and were shut down.
Lessons learned – Be clear on your pricing structure and what does or doesn’t have to be charged inclusive of VAT – because consumers are being very unforgiving when it comes to mistakes. This is especially important if your business works within healthcare or education. For example, medical equipment registered or approved by the Ministry of Health and Prevention are classed as 0% VAT items.
3. Small business punishment: There are reports that freelancers and startups are finding life just that little bit tougher since VAT was introduced. This is because of an unforeseen knock-on effect – some companies are refusing to work with unregistered businesses.
As we saw earlier, any small business with revenues less than AED 375,000 doesn’t have to register for VAT, although it can choose to do so as long as its revenue exceeds AED 187,000. But this also means that businesses which don’t reach the AED 187,000 figure don’t have a tax registration number (TRN). This is causing a sticking point because we’ve heard that some suppliers and purchasers are now asking for one anyway.
Lessons learned – If your company is small enough to not need a TRN then be sure to point this out to clients early on and save headaches further down the line. However, should this become a big issue for your company then it may well be worth – as some are already doing – teaming up or creating a partnership with other small businesses to ensure your revenue rises above the AED 187,000 cut-off. With the help of an accountant or VAT professional, it should be possible to bring yourselves under a single licence for VAT purposes while still keeping separate profit centres.
4. Regional exemptions exist: There was some confusion at the start of January about whether VAT would apply equally to tax-registered businesses in the mainland and the free zones. As things turn out there was no simple answer.
Of the 45 free zones in the UAE, 20 have been given an exemption. These include some free zones in Abu Dhabi, Dubai and Sharjah. Transfer of goods between the zones is also VAT-free, so long as the products are not used or altered.
Lessons learned – For any startup, these free zones should be of huge interest because they offer a way to keep prices down compared to competitors on the mainland. Along with not paying VAT, free zones come with other perks too, including 0% corporate and personal tax, as well as 100% company ownership and repatriation of capital and profits. They’re definitely an option worth exploring.
5. No plans to raise it: When the introduction of VAT was first announced, one of the big fears was that this was just the tip of the iceberg. That it wouldn’t be long until it started to rise.
It isn’t the tax so much that is scary – after all, businesses can claim a lot of it back. It’s what it does to the consumer and inflation. If the cost of a product becomes too high, the consumer stops purchasing. This also causes motivation and productivity issues because employees are no longer able to afford the same number of items with their salary. Should the cost of living rise too high, employees will also start to demand pay rises.
And recent figures have only stoked this fear: in January, inflation in the UAE jumped 1% to reach its highest point in nine months at 2.7%. In Saudi Arabia, the jump was even bigger, from 0.4% to 3%, while some countries in the Gulf – including Bahrain, Kuwait and Oman – have even delayed introducing VAT because of concerns about inflation.
However, in February 2018 the Minister of State for Financial Affairs moved to allay fears by claiming that there were no immediate plans to raise the rate of VAT over the next five years.
In February 2018 the Minister of State for Financial Affairs moved to allay fears by claiming that there were no immediate plans to raise the rate of VAT over the next five years.
Lessons learned – Governments change their minds all the time, so put a plan in place to cope with any sudden VAT and inflation rises. It is not uncommon for companies to swallow a VAT hike themselves – at least in the short term – if they think there is a risk consumers will desert their business. Coffee shops are a prime example of this because they sell a luxury item, something people can decide to cut out in order to save extra cash.
UAE and VAT – tell us about your experience
So these were the top five things we have learned since the introduction of VAT to the UAE. If you’ve found something different then be sure to let us know in the comments. We would love to hear from you.
Ultimately, for a region so used to low taxation, the introduction of VAT to the Gulf was always going to be a rocky ride. But so long as we stay ahead of the game, and learn from experiences, our companies should cope just fine going forward.
Virtuzone Mainland is dedicated to helping clients open a company on the UAE mainland, providing advice and assistance with every aspect of the company formation. To set up a consultation, please call us on +971 4 457 8200, send an email to email@example.com or click here.