17 October 2023
By Sam Alex
VAT (Value Added Tax) might seem like a very straightforward concept, but upon being applied practically, people often find it difficult to understand how it impacts their business.
For you to understand in standard language, VAT is the concept that defines itself as the consumption tax that gets levied over the product every time a value is included in the supply chain. VAT is considered the recent inclusion to the UAE tax system, and that rate it is kept minimal at just 5%.
5% might not sound that big of a number, but it has a great impact on the businesses in the UAE. Let’s take this article further and try to understand how VAT impacts the overall accounting practices and business operations in the UAE.
VAT is the tax that customers are asked to pay upon consumption of any services or goods. A 5% of VAT will be implemented onto the final bill at any point of sale. Businesses are meant to collect the VAT and then account for the same for tax on the government’s behalf.
VAT was introduced to citizens of the UAE on 1st January 2018. It is meant to provide the country with a new income source, which shall be used continually to provide the citizens with high-quality public facilities.
Moreover, the inclusion of this tax is envisioned to help the government achieve its goals of reducing the dependency on oil or other hydrocarbons as the primary source of the country’s revenue.
VAT is not the cost for a company to bear! The businesses tend to act as the agent or mediator for the government for collecting VAT from all the end-users or consumers. The financial or administrative challenges that the businesses have to bear might seem stressful at the start.
But, considering the long run, your business will turn out to be more profitable and efficient. Once the VAT collection and the tax payment are planned and executed properly, it won’t be hitting your business’s profit or loss account at all.
But, if the VAT goes unclaimed, then it would surely affect the profit adversely. It might be easier for larger enterprises to set up an accounting team to look after the VAT implementation and claims. But, for small startups, it is important to be aware and alert about collecting and claiming VAT.
The startups must create an implementation strategy for ensuring that all the right records and being retained and necessary steps are being taken to file the VAT returns every year. Once you make it a habit to fulfil all your VAT regulations, your profit won’t get hampered, and the operations will continue to run proficiently.
Following that, one of the negatives of VAT for businesses in the UAE is the inclusion of bigger costs. With the new VAT scheme, the cost of operations has increased due to the implementation and admin expenses. Moreover, the internal and IT systems also needed upgrades, and employees will be trained to comply with the VAT processes and other such policies associated with it.
Therefore, a complete change to the business structure will be imposed, and the cash flow will be affected. People who have more than two businesses in UAE that sell same services or products will have to bring everything under one business name. It is to avoid paying the VAT twice! it is advised to consult a Tax consultant in UAE
Once you have registered your organisation for VAT in UAE, there will be a lot of obligations. You must be charging VAT only on the goods or services that are taxable, as specified by the government. There is also a need for companies to file their VAT return forms completely and accurately within the given deadlines to receive claim benefits.
Businesses are held responsible for carefully documenting all of their business income, expenses and VAT charges. All the registered traders or businesses will be charging VAT to all of their customers at the prevailing rate. Following that, VAT should be incurred on all the goods or services that the businesses buy from the suppliers.
VAT-registered companies in the UAE are liable to report all the amount of VAT they have added to their bills and the amount they have paid to the government. And this shall be done on a very regular basis! All the formal submissions and detailed reporting need to be done online and within the required deadlines.
If the businesses have charged a higher VAT but have paid a lesser amount to the government, then they will have to pay the difference within the given time. If the paid amount is higher than the collected VAT amount, then the businesses can reclaim the extra amount.
In the chaos of running your business operations, handling all of these VAT-related tasks and record-keeping might be an added effort, which might overburden you and your staff. Therefore, hire professional accountants who would help you manage all tasks associated with collecting, recording, maintaining or filing tasks related to VAT in UAE.
Some of the challenges that businesses experience upon implementing VAT into their business in UAE are:
The cost of hiring new admin employees and training them is an added burden for the operational expenses.
A VAT-registered business in UAE is required to prepare or keep a proper business record with annual accounts, purchase daybooks, general ledges, invoices and other such documents mandatorily for at least a 5-year period. This is very challenging for businesses to cope with!
The ideal solution to these challenges is to outsource your VAT management work to professional accounting agencies. In this way, you won’t have to hire new employees, spend on their training expenses, and pay them additional employee benefits.
Moreover, these professionals will also be helping you in keeping all the records safe, not just for a 5-year period but throughout your business’s partnership with them. So, this is an affordable yet effective way to implement and manage VAT for your business by overcoming these challenges.
Some of the case studies associated with VAT transactions that all UAE business owners must know are:
When you import anything to UAE, there will be customs duty as an application. The VAT in the country will be calculated based on the gross price, which is the sum of purchase value and customs duty. The importer won’t have to pay the VAT right at the time of importing goods, but later on.
If the order is booked from any of the representatives of a Singapore customer in Dubai, UAE, the payment is then received locally. Goods will be imported directly to Singapore. As per this case study, the supply of goods is done to a place that’s outside the UAE. Hence, no VAT will be levied in this case. The taxable country is Singapore, in this case!
This is a clear depiction of how important it is for businesses in the UAE to take control of their VAT management. A little mistake can result in immense loss and operational mismanagement. Therefore, if you want to be optimised with your VAT management, it is advised you hire professional accounting experts to look after the same for you!
It will help you save a lot of time that you can dedicate to the other core operations of running your business!