After attending the Ministry of Finance Workshop earlier this week I have concluded that not everything you read about VAT in the papers can be trusted. The Workshop entitled: Phase 1: VAT and Excise Awareness Campaign was a joy to attend, as finally here was official UAE specific VAT guidance. It was a great workshop and I would highly recommend it for all UAE business owners.
The GCC wide VAT legislation leaves some decisions regarding which goods or services to make exempt from VAT and which to make zero-rated and also gives a choice between making a taxable supply standard rated or zero-rated. These options have been highly covered in the media from the perspective of the GCC legislation, but no one seems to have reported on the specific rules the UAE has actually opted for.
So an update direct from the Ministry of Finance workshop; The UAE has aimed to simplify the VAT rules as much as possible so that the general rule is that all goods and services are subject to VAT and the exceptions to this rule have been kept to a minimum.
So the majority of basic healthcare and education will be subject to VAT but at the zero rate i.e. not exempt from VAT which is what has been widely reported in the media. Also all food items are subject to standard rate VAT i.e. they will have 5% VAT on them. Again this is contrary to what was reported in the media where there was much talk of 100 basic food items being zero-rated. Both of these clarifications are good news for business. Why?
Being a business dealing with exempt supplies means that the business can not register for VAT and therefore can not reclaim VAT on its purchases. However, being a supplier of zero-rated supplies allows a business to register for VAT and allows them to consequently reclaim VAT incurred on purchases. A business making zero rated supplies therefore has no net VAT cost to bear, unlike the business making exempt supplies which has to bear the cost of VAT on its purchases.
With all food items being standard rated rather than some at zero rate and others at standard rate clearly simplifies the VAT processing from the food retailers perspective. Although it does mean as end consumers we personally will end up seeing our food bills increasing by 5%!
The Ministry of Finance workshop confirmed that businesses with annual taxable turnover of over 375,000 Dhs will need to register for VAT. Voluntary registration will be available for businesses with annual turnover of 187,500 Dhs, those below this threshold can not register. However there is a concession for those that are below this threshold but are start-ups i.e. businesses incurring expenses but earning no revenue. These businesses will be able to add together taxable turnover and taxable expenses to meet the 187,500 Dhs threshold. Allowing them to register, if they wish, and reclaim input VAT suffered on their purchases ahead of earning revenue, thus helping to improve their cash flow. A generous concession to new businesses!
Online VAT registration will open during 2017 Quarter 3, with registration being compulsory during 2017 Quarter 4. The online registration will be on the newly formed Federal Tax Authority (FTA) website which is due to be launched soon. The FTA will be the government department tasked with administering and collecting VAT in the UAE.
The speakers at the workshop said that the UAE is expected to be VAT ready for 1 Jan 2018 and that this is the target date for UAE VAT to go operational. While the errors and late filing penalties have not been finalised, there was a clear indication that they would be announced in due course and are intended to be used as necessary!
All submissions of VAT returns and VAT payments will be online. VAT returns will be required to be submitted for a three month period (not necessarily a 3 calendar month period – you will be allocated your three monthly VAT cycle dates on registration). Online payment and submission of the VAT return will be due 28 days after the end of the VAT period.
The implication of the 28 day submission period highlights that businesses must have their accounting systems and processes running as closely to real time as possible, so that they are able to meet this reporting deadline and not face late filing penalties. Reporting requirements will be for totals of output VAT collected from customers and input VAT suffered on purchases, with the net amount due for payment or repayment. However the essence is to ensure that the numbers submitted have a solid audit trail so that if FTA inspectors arrange an audit of your business you are able to show them the documentation that supports your submission. Any businesses without robust accounting systems and processes in particular to record invoices and documentation received from suppliers to support refunds of input VAT will potentially struggle to convince the FTA that their VAT submissions are accurate. Not a good situation to be in.
The time is ripe to review how robust your accounting systems and processes are and to take action to be VAT ready.
Contact The Accounts Dept. for help in setting up an appropriate accounting system for your business, [and stay in the loop on VAT announcements by following The Accounts Dept. blogs on our website, social media and Linkedin.]
Written by Faiza Khan, The Accounts Dept.
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