VAT In The UAE

What Will the Introduction of VAT to the UAE Mean to Your Business?

The much mooted introduction of VAT (Value Added Tax) across the UAE appears to be gathering momentum and businesses, which have previously traded free of any Value Added Tax, will have to be ready.  This readiness will take a number of forms and this article will outline some of the areas business owners will need to take into account.

Accounting Software

For many businesses keeping accounting records is a discipline they have in place and their accounting software has been tailored to meet their reporting requirements.  For these businesses the adoption of VAT will mean switching on the tax function for sales and purchases and adopting the VAT rate applicable.  It has been suggested that this initial rate will be 5% though there are no readily available facts to back this up.  A VAT control account will be set up in the balance sheet and all Value Added Tax (input and output tax) will be collected.

For those businesses without formalised accounting records the purchase of accounting software would seem to be a necessity.  Most accounting software has sales and purchase tax capabilities built-in and the set up will take place as part of the initial software installation.

In both cases the help of an accounting professional would be advised to ensure the software set up captures the information correctly from data sources or manual input.

VAT Reporting

Most revenue collection services have set dates for submitting VAT returns and for payment of Value Added Tax owed.  Standardised reporting is normally provided to businesses and they are expected to complete these reports in an accurate and timely manner.  Failure to adhere to reporting deadlines normally results in penalties, and sometimes fines, so compliance is of paramount importance.

Most accounting software systems will have VAT reporting capability to show all input and output activity for the period under review.  These reports should show the net amount payable to the revenue service and should also agree to the Value Added Tax control account maintained in the balance sheet.

Cash Flow Management

In today’s UAE business environment all sales revenue collected is available to be used by the business to pay suppliers, salaries, bonuses and sometimes dividends.  Under a VAT regime, sales will have an added monetary value attached to them.  These additional monies will be payable to the revenue service so careful cash management will have to be introduced.  Businesses should be careful not to use VAT monies collected to service working capital requirements.  The simple introduction of a secondary bank account to collect VAT monies owed should ensure payments can be met when requested.

 

Understanding VAT Rules and Regulations

Most VAT systems have clear rules and regulations about which goods or services are applicable for sales and the VAT that can be reclaimed.  Having a clear understanding of these rules can potentially save the business money and ensure that penalties and fines are not incurred.

Closing Thoughts

The UAE revenue service will, no doubt, provide clear and concise instructions on the new VAT system but an accounting professional should probably be consulted to ensure the rules are adopted correctly.

We have only touched on some of the potential impact points from the introduction of a new Value Added Tax system. These comments are based on previous experience from other countries with established systems.

Though the introduction date has not been announced the VAT Law has been drafted and we feel it will be a case of when, and not if, the law is enacted.  We would anticipate there being a grace period for adoption (as with the new Companies Law update related to maintenance of accounting records) but now is a good time to start thinking about how you can future proof your business with the minimum of disruption.

If you feel any of the above points will affect your business feel free to contact us at UAE Business Solutions to discuss their potential impact.

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