What if your business turnover falls below the compulsory VAT registration threshold?

There will be a compulsory VAT registration threshold announced when the details of the VAT laws are released.  Typically, this requires all businesses with turnover higher than the VAT registration threshold to become VAT registered and account for VAT.  This means that the business must charge VAT on their sales (output VAT), but will be able to reclaim any VAT suffered on its purchases (input VAT). The net of output and input VAT is then paid to the VAT authorities.

If the turnover of the business is less than the VAT registration threshold, the business is not required to register for VAT. Not registering for VAT  means that the business does not need to separate out the VAT on purchases or sales in the accounts, and in fact does not have to charge VAT on the sales of the business.  At first glance this may look like good news. No need to do anything different, right? Wrong.  If the business is not accounting for VAT, then the business is treated as the ultimate user of the VAT-related purchase, which means that the business “suffers” the VAT So non-registration does not mean that the business will not pay VAT, it means that the business cannot reclaim the VAT that it has paid. So the costs to the business will go up by the amount of the VAT paid on its purchases (standard rate VAT is currently 5%).

The business should obviously consider the costs involved in accounting for VAT versus not accounting for VAT if they are below the threshold (assuming voluntary VAT registration will be an option within the UAE legislation).  However, it should be noted that the burden of proof for trading below the threshold falls on the business, not the VAT authorities, so you need to keep good accounting records to be able to prove that you have not yet  reached the threshold.

A final point, for companies who are trading below the VAT registration threshold, but not by much, vigilance is advised, as there are likely to be strong penalties if the threshold is reached but VAT inadvertently is not accounted for. VAT accounting will become a legal requirement at the point at which the threshold is reached, so businesses should use their accounts to continually monitor where they are in relation to the VAT registration threshold.

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 Gabrielle Kane, an ICAEW Chartered Accountant, who works at The Accounts Dept. in Dubai.

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