VAT implementation in the UAE is expected to begin on 1 January 2018, however businesses are likely to have a 12-month window in which to get their VAT processes operational.
The Gulf Cooperation Council (GCC) is expected to adopt a standard VAT system with a single rate of 5% applying to most goods and services. However there are likely to be some limited exceptions such as basic food items, which will be zero rated – meaning although VAT on sales are charged at 0% VAT, input VAT suffered on purchases will still be recoverable.
Other sectors, namely healthcare and education, will be exempt from VAT – businesses in these sectors will be unable to register for VAT, so will not charge VAT but will also be unable to reclaim any VAT suffered on purchases. Compulsory VAT registration thresholds have yet to be announced, but are expected to apply to businesses with annual turnover of somewhere between US $0.5m-1m.
Although this threshold may be significantly higher than the turnover expected by some SMEs, this is the right time to be thinking about how VAT will impact your business. If you have large capital investment plans coming up over the next few years, it would be worthwhile considering how much of that could be pulled forward to before VAT is implemented in the UAE, so that large capital items can be purchased without suffering the VAT charge.
Do you have long-term contracts with your customers that will run over into 2018? It is worth putting in a ‘change of law’ clause to allow for contracts to be updated to charge VAT on top of the agreed prices when the VAT laws becomes effective (assuming your business will have to register for VAT). Otherwise your customers may be reluctant to foot the VAT bill and could insist you pay the VAT due on the contract out of your margin.
If you will need to register for VAT, you need to consider if you have accounting software that can record VAT, both on purchases and sales invoices, so that you have the necessary VAT information readily available to report to the VAT Authority. If not you need to consider the time line of when you need to begin adapting your systems and processes to allow for this.
If your business is likely to not be VAT registered, either because of not meeting the VAT turnover threshold or because your business operates within an industry likely to be VAT exempt (healthcare and education), it is worth reviewing the input VAT that will be suffered on the purchases your business makes. These VAT costs will not be recoverable and therefore represent a real cost to your business.
Once VAT becomes effective in the UAE and your suppliers become VAT registered, any purchases bought from them will include a VAT charge. If your business is not VAT registered you are not able to reclaim that VAT. You need to consider whether there are smaller non-VAT registered suppliers you could switch to, or if that’s not possible you need to consider the impact of a higher cost base on your profit margins and how you will reflect that in your pricing.
Written by Faiza Khan, The Accounts DeptBACK TO BLOG