How to Calculate VAT in UAE

VAT (Value Added Tax) is a fundamental part of the UAE's tax system, applying to nearly every business that sells goods or services. Since its introduction in 2018, VAT has been set at a standard rate of 5%, requiring businesses to calculate, report, and pay the correct amount to stay compliant with the Federal Tax Authority (FTA).

However, miscalculating VAT can have serious consequences. According to the FTA, VAT non-compliance penalties can reach up to 300% of the unpaid tax amount, leading to substantial fines and operational risks. Many businesses struggle with how to calculate input tax, determine output VAT, reclaim VAT correctly, and apply the proper VAT treatment to transactions.

In this guide, we’ll break down how to calculate VAT in the UAE step by step. You’ll learn how to determine your VAT liability, apply the correct formulas, and avoid common mistakes that could lead to penalties.

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What is VAT?

Value Added Tax (VAT) is an indirect tax levied on the supply of goods and services at each stage of the production and distribution chain. Unlike corporate tax, which businesses pay on profits, VAT is collected from consumers and remitted to the government by businesses.

The UAE introduced VAT as part of its efforts to diversify revenue sources and reduce dependence on oil. The standard VAT rate is 5%, applied to most goods and services. However, there are two additional types of VAT: zero-rated VAT and VAT-exempt supplies.

Types of VAT in the UAE

• Standard-rated VAT (5%): Most goods and services in the UAE are subject to the standard 5% VAT. Businesses must charge this VAT on sales (output VAT) and pay it on purchases (input VAT).
• Zero-rated VAT (0%): Certain categories of goods and services—such as exports, international transport, and specific healthcare and educational services that meet the UAE’s regulatory criteria—are subject to a 0% VAT rate.
• VAT-exempt supplies: Some supplies, such as residential leases, local passenger transport, and specific financial services, are exempt from VAT.

How VAT Works for Businesses

VAT operates on an input-output mechanism, where businesses collect VAT on sales (Output VAT) and pay VAT on purchases (Input VAT). 

The difference between these amounts determines whether a business owes VAT to the FTA or is eligible for a refund.

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Step-by-Step Guide to Calculating VAT in the UAE

Before diving into VAT calculations, it’s important to understand who needs to register for VAT in the UAE. Businesses with annual taxable supplies and imports exceeding AED 375,000 are required to register for VAT, while those with revenues between AED 187,500 and AED 375,000 can opt for voluntary registration.

Once registered, calculating VAT accurately becomes crucial—whether you're charging customers, reclaiming input VAT, or determining your VAT liability to the Federal Tax Authority (FTA). This step-by-step guide will help you navigate the process with clarity and confidence.

Step 1: Identify Whether the Transaction is Subject to VAT

Before calculating VAT, you must determine whether a sale or purchase is subject to VAT and which VAT category it falls under.

• Standard-rated (5%): Most goods and services in the UAE, including retail, professional services, and hospitality, are taxed at 5% VAT.
• Zero-rated (0%): Some exports, healthcare services, and educational services are subject to a 0% VAT rate, meaning VAT is charged but at 0%, and businesses can still reclaim input VAT.
• Exempt supplies: Certain financial services, residential rentals, and local transport are exempt from VAT. Businesses dealing with exempt supplies do not charge VAT and cannot reclaim input VAT.

Example: If a company provides accounting services, it falls under the standard-rated VAT category (5%). However, if the company exports its services outside the UAE, it could be zero-rated (0%), affecting the VAT calculation.

Step 2: Calculate Output VAT (VAT on Sales)

Output VAT is the VAT a business collects from customers when selling goods or services. The formula to calculate output VAT is:

VAT Amount = Sale Price × 5%

Total Price (Including VAT) = Sale Price + VAT Amount

Example: A company sells office furniture for AED 2,000. The VAT calculation would be:

• VAT amount: AED 100 (AED 2,000 × 0.05)
• Total amount payable by the customer: AED 2,100 (AED 2,000 + AED 100 VAT)

Step 3: How to Calculate Input Tax (VAT on Purchases)

Input VAT is the VAT a business pays on purchases of goods and services. If a business is VAT-registered, it can reclaim this VAT when filing VAT returns, provided the purchases are used for taxable supplies and not for exempt supplies.

The formula to calculate input VAT is:

Input VAT = Purchase Price × VAT Rate

Example: If a company purchases laptops for its employees at AED 5,000 each, the VAT calculation would be:

• VAT paid per laptop: AED 250 (AED 5,000 × 0.05)
• Total cost per laptop (including VAT): AED 5,250

If the business purchases exempt supplies, such as residential rental space, VAT is not charged, and no input VAT can be reclaimed.

Step 4: Compute Net VAT Payable or Refundable

Once you've calculated output VAT and input VAT, the next step is to determine the VAT payable to the Federal Tax Authority (FTA).

The formula for VAT payable:

VAT Payable = Output VAT – Input VAT

Example 1: VAT Payable

A business:

• Collected AED 10,000 in VAT from customers (Output VAT)
• Paid AED 6,000 in VAT on business expenses (Input VAT)

The VAT payable is calculated as:

VAT Payable = Output VAT - Input VAT

VAT Payable = 10,000 - 6,000 = AED 4,000

This means the business must pay AED 4,000 to the FTA when filing VAT returns.

Example 2: VAT Refund

If a business:

• Collected AED 8,000 in VAT from customers (Output VAT)
• Paid AED 10,000 in VAT on purchases (Input VAT)

The VAT refund is calculated as:

VAT Refund = Output VAT - Input VAT

VAT Refund = 8,000 - 10,000 = AED -2,000

Since Input VAT is greater than Output VAT, the business can request a VAT refund from the FTA.

Step 5: Adjust for VAT-Exclusive vs. VAT-Inclusive Prices

Businesses often receive invoices or set prices that are VAT-exclusive (excluding VAT) or VAT-inclusive (including VAT).

VAT-Exclusive prices: If the price is VAT-exclusive, apply the following formulas:

• VAT Amount = Price × 0.05
• Total Price = Price + VAT Amount

VAT-Inclusive prices: If the price is VAT-inclusive, extract VAT using these formulas:

• VAT Amount = (Price ÷ 1.05) × 0.05
• Net Price = Price ÷ 1.05

Example: A retail store sells a product for AED 1,050 (VAT-inclusive). To extract the VAT amount:

• Net price = AED 1,000 (AED 1,050 ÷ 1.05)
• VAT amount = AED 50 (AED 1,050 - AED 1,000)

If the store sets a VAT-exclusive price of AED 1,000, the final price would be:

• VAT amount = AED 50 (AED 1,000 × 0.05)
• Total price (including VAT) = AED 1,050

Step 6: Verify VAT Compliance and Record-Keeping

Proper VAT calculation requires businesses to maintain records and verify compliance with FTA regulations. Failure to do so can result in penalties. Businesses must:

• Issue VAT-compliant invoices: Every transaction should include a VAT invoice with the Tax Registration Number (TRN), VAT amount, and total payable.
• Maintain VAT records: Keep VAT invoices, purchase receipts, and VAT return filings for at least five years as per FTA regulations.
• Use VAT-compliant software: Automating VAT calculations through accounting software ensures accuracy and compliance while reducing manual errors.

Step 7: Submit VAT Returns and Make Payments on Time

VAT returns must be filed electronically through the FTA portal within 28 days after the end of each tax period (monthly or quarterly). Late filings can result in heavy fines.

By following these steps, businesses can accurately calculate VAT, determine their tax liabilities, and avoid compliance risks.

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Other VAT Scenarios and Examples

VAT calculations in the UAE are not always straightforward. Businesses frequently encounter complex VAT scenarios, such as exporting goods, applying discounts, handling promotional offers, and dealing with imported services. Each situation requires careful VAT treatment to ensure compliance with Federal Tax Authority (FTA) regulations.

Below, we break down key VAT scenarios and how businesses should handle them.

1. Exporting Goods and Applying 0% VAT

Exports of goods and services outside the UAE are generally zero-rated, meaning businesses do not charge VAT on exports but can still reclaim input VAT on associated costs. However, to apply 0% VAT, businesses must meet certain conditions set by the FTA.

The key conditions for 0% VAT on exports:

• The goods must be physically transported outside the UAE within 90 days of the supply date.
• The supplier must maintain official export documentation, such as customs declarations and shipping records.
• Payment for the goods must be made through a traceable banking channel.

Example: A UAE-based electronics company sells AED 50,000 worth of goods to a client in the UK. The VAT charged is 0%, making the total payable by the UK client AED 50,000.

 However, the business can still reclaim input VAT on expenses related to producing or shipping these goods, such as import duties, raw material costs, and transportation expenses.

2. Handling VAT on Discounts and Promotional Offers

When businesses offer discounts, cashbacks, or promotional price reductions, VAT must be applied to the discounted price rather than the original price.

To calculate VAT on the discounted price, multiply the discounted price by 5%.

Example: A retail store sells a smartphone priced initially at AED 4,000 but offers a 10% discount.

• Discounted price is AED 3,600 (AED 4,000 minus AED 400 discount)
• VAT amount is AED 180 (5% of AED 3,600)
• Total price after VAT is AED 3,780

The retailer charges VAT on AED 3,600, not AED 4,000, ensuring compliance with FTA regulations.

3. VAT on Free Samples and Promotional Goods

Many businesses distribute free samples or promotional goods for marketing purposes. In such cases, VAT treatment depends on whether the goods qualify as deemed supplies under UAE VAT law.

When is VAT applicable on free goods?

VAT is payable at 5% if:

• The business claimed input VAT on the goods when purchasing them.
• The value of the free goods exceeds AED 500 per recipient per year.

VAT is not applicable if:

• The business did not reclaim input VAT on the goods.
• The free goods qualify as genuine business gifts under FTA guidelines.

Example: A cosmetics company distributes 100 free skincare products worth AED 300 each to influencers. Since the total value per influencer is below AED 500, no VAT is applied. However, if the company gave each influencer AED 1,000 worth of free products, VAT would be 5% of AED 1,000, which is AED 50 per influencer.

4. Reverse Charge Mechanism for Imported Goods and Services

When businesses import goods or services into the UAE, VAT is not charged by the foreign supplier. Instead, the UAE-based business must self-account for VAT under the Reverse Charge Mechanism (RCM).

The reverse charge ensures VAT is collected even when foreign suppliers do not charge it, preventing tax avoidance.

Here’s how reverse charge works

1. The business calculates 5% VAT on the import value and records it as output VAT.
2. The same amount is recorded as input VAT, effectively neutralising the VAT impact.

Understanding how to calculate input tax under the reverse charge mechanism is essential for accurate VAT reporting. If the business is fully VAT registered, there is no actual VAT cost, as input VAT offsets output VAT.

Example: A UAE-based company imports consulting services from a UK firm worth AED 20,000.

• VAT under Reverse Charge is AED 1,000 (5% of AED 20,000)
• Recorded as output VAT is AED 1,000
• Recorded as input VAT is AED 1,000

Since both VAT amounts cancel each other out, there is no additional VAT cost for the business. However, failure to report reverse charge VAT correctly can result in penalties.

5. VAT Treatment for Mixed Supplies (Standard, Zero-Rated, and Exempt Supplies)

Some businesses sell a combination of standard-rated, zero-rated, and VAT-exempt products, requiring them to apply different VAT treatments within a single transaction.

The steps for handling mixed VAT transactions:

1. Identify each supply category (standard-rated, zero-rated, exempt).
2. Apply the correct VAT rate to each item in the invoice.
3. Understand how to calculate input tax proportionally based on taxable supplies.

Example: A travel agency provides a package deal that includes:

• Hotel booking (standard-rated at 5%) for AED 5,000
• International flight tickets (zero-rated at 0%) for AED 3,000
• Travel insurance (VAT-exempt) for AED 1,500

VAT calculation for mixed supplies:

• Hotel booking VAT is AED 250 (5% of AED 5,000)
• Flight tickets VAT is AED 0 (zero-rated supply)
• Insurance VAT is AED 0 (exempt supply)
• Total VAT charged to the customer is AED 250

The business can only reclaim input VAT related to taxable supplies (hotel booking) but cannot reclaim input VAT on exempt supplies (insurance services).

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Common VAT Mistakes Businesses Make

Calculating VAT in the UAE seems straightforward, but businesses often make errors that lead to penalties, incorrect filings, and compliance issues. Below are the most common VAT mistakes that businesses must avoid.

1. Misclassifying supplies as standard, zero-rated, or exempt: Applying the wrong VAT rate can result in underpayment or overpayment of VAT, leading to penalties or loss of input VAT recovery. Businesses must correctly identify whether their supplies fall under standard-rated (5%), zero-rated (0%), or exempt categories.

2. Failing to apply the reverse charge mechanism on imports: Businesses importing goods or services from foreign suppliers must self-account for VAT under the Reverse Charge Mechanism (RCM). Many companies fail to report these transactions, leading to non-compliance and potential penalties.

3. Incorrect VAT calculations on discounts and promotional offers: VAT must be calculated on the final price after applying discounts. Many businesses mistakenly apply VAT to the original price instead of the discounted amount, leading to incorrect tax filings and overcharging customers.

4. Overclaiming or underclaiming input VAT: Many businesses fail to track input VAT on purchases correctly. Some overclaim VAT on ineligible expenses, while others miss reclaiming valid input VAT, leading to financial losses or potential audits.

5. Filing VAT returns late or missing deadlines: The FTA imposes heavy penalties for late VAT return submissions and payments. Many businesses miss deadlines due to poor tracking or last-minute errors in VAT filings, resulting in fines starting at AED 1,000 and increasing for repeat offences.

6. Not keeping VAT-compliant records for 5+ years: Under UAE VAT law, businesses must maintain VAT records for at least five years. Failure to do so can result in hefty penalties and challenges during audits.

7. Misreporting VAT on free samples and business gifts: VAT is often overlooked on free samples and promotional goods. If businesses have claimed input VAT on these items and their value exceeds AED 500 per recipient per year, they must be reported as deemed supplies.

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Simplify VAT Compliance with Alaan

Managing VAT manually is time-consuming, error-prone, and can lead to costly penalties. At Alaan, we streamline VAT compliance, expense tracking, and reporting so your business stays compliant without the administrative burden.

Here’s how Alaan helps businesses like yours with VAT compliance:

1. Automated VAT data capture and categorisation: Manually calculating VAT for every transaction increases the risk of errors. With Alaan, VAT is automatically extracted from receipts and categorised based on standard-rated (5%), zero-rated (0%), and exempt transactions. This ensures accurate VAT reporting and minimises non-compliance risks.

2. Real-time expense tracking and VAT reporting: Keeping up with VAT deadlines can be stressful. Alaan provides real-time financial insights, helping you track VAT liabilities and generate accurate VAT reports instantly. Our platform eliminates last-minute calculations and ensures that your VAT filings are always correct.

3. Seamless receipt management: VAT audits require businesses to maintain VAT-compliant records for at least five years. Alaan stores and organises all your receipts digitally, ensuring easy retrieval and audit-ready documentation for the Federal Tax Authority (FTA).

4. Accounting software integration for effortless VAT filings: Manually transferring data to your accounting software can lead to discrepancies. Alaan seamlessly syncs with QuickBooks, Xero, and other accounting tools in one click, eliminating manual VAT reconciliation and ensuring smooth, error-free tax filings.

6. Alaan Corporate Cards for VAT-compliant spending: Managing VAT on business expenses becomes easier with Alaan's corporate cards, which offer real-time transaction tracking, automated categorisation, and instant VAT compliance. Every expense is logged with VAT details, reducing manual work and ensuring accurate tax reporting.

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Conclusion

Calculating VAT correctly is essential for maintaining compliance and avoiding costly penalties in the UAE. Whether you're dealing with standard-rated transactions, zero-rated exports, or VAT-exempt supplies, understanding how to apply the right tax treatment is crucial. 

However, manual VAT management can be tedious, error-prone, and time-consuming. That’s where automation makes a difference. With Alaan, VAT compliance is no longer a complex, time-consuming task. 

Our AI-powered spend management platform ensures that every VAT transaction is accurate, audit-proof, and seamlessly integrated into your financial systems.

Want to automate VAT tracking and eliminate manual errors? Schedule a free demo today and see how Alaan simplifies VAT management for your business!