Key Highlights of VAT in the UAE

The introduction of VAT (Value Added Tax) in the UAE (United Arab Emirates) on January 1, 2018, marked a major change in the country’s taxation landscape. This indirect tax aimed to diversify the revenue sources for government departments to maintain public service standards. It is also helping the UAE realize its vision of lowering its dependence on revenue from oil and other hydrocarbons. Over the years, VAT has become a fundamental part of the UAE’s financial framework. 

Like many other countries, VAT in the UAE is a general consumption tax applied to products or services at each stage of the supply chain. The tax amount is included in the sale price of products or services and must be paid by consumers. Businesses only act as agents here, collecting VAT from the final users and then remitting it to the government with the tax returns.

In this blog, we will discuss different aspects of VAT in the UAE and cover details about its workings and different rules related to this tax. 

How much is VAT in the UAE?

The Federal Tax Authority (FTA) announced a standard 5% VAT in the UAE. This tax applies to most goods and services that are referred to as ’standard rate supplies.’ 

This indirect tax is also applicable to ‘deemed supplies’, though they don’t meet the general definition of supplies, are still subject to 5% VAT. They are: 

• Relocation of business assets between the UAE and other GCC nations with a similar VAT law.
• Sale of business assets without receiving any payment.
• Use of products for non-business purposes after claiming input tax.

All goods and services are not taxed at this standard rate in the UAE. Some goods and services are exempt from VAT  and are taxed at 0% rate. These include certain educational services, healthcare services, and the export of services and goods outside the GCC (Gulf Cooperation Council) region.

A business is required to register for VAT when its taxable imports and supplies cross the mandatory registration threshold of AED 375,000. Companies also have the option for voluntary VAT registration if their supplies and imports are below AED 375,000 but are more than AED 187,500. Understanding these regulations is key to ensuring compliance with VAT regulations and avoiding any penalties.

How does VAT work in the UAE? 

VAT in UAE functions as an indirect tax, and is levied at different steps in the supply chain from manufacturing to final sale. While it is collected by an intermediary like a retailer or wholesaler, the burden ultimately falls on the final consumer as the tax is included in the final purchase price. 

Businesses along the supply chain collect and account for the tax on behalf of the government.

Here’s an example to understand how VAT is calculated in the UAE. A manufacturer sells a product for AED 100 to a wholesaler. As the VAT rate in the UAE is 5%, the manufacturer charges the wholesaler AED 5 in VAT. So, the wholesaler pays a total of AED 105.

The wholesaler then sells the product to a retailer for AED 150. It charges AED 7.5 in VAT (5% of AED 150), so the retailer pays a total of AED 157.5. However, the wholesaler claims a VAT refund of AED 5 from the VAT paid to the manufacturer, so it only remits AED 2.5 as the amount of VAT to the government.

The retailer sells the product for AED 200 to the end consumer. The retailer charges AED 10 in VAT (5% of AED 200), so the consumer pays a total of AED 210. The retailer claims a tax refund of AED 7.5 for the VAT paid to the wholesaler and remits AED 2.5 in VAT to the government.

In this way, the end consumer ultimately bears the cost of the VAT (AED 10 in this case). 

VAT Registration for Businesses

Under UAE VAT regulations, it is mandatory for any business with taxable supplies and imports above AED 375,000 in the previous year to register for VAT. This threshold ensures that smaller enterprises are not burdened with the formalities related to VAT in the UAE.

Businesses with taxable supplies and imports (or taxable expenditures) that exceed AED 187,500 annually can opt for voluntary VAT registration. After the tax registration, these enterprises can recover VAT paid on business-related purchases, which is a considerable financial advantage.

Enterprises can also register voluntarily for VAT if their annual expenses cross the voluntary registration threshold of AED 187,500. This provision assists start-ups that have not yet generated any revenue.

The VAT registration process in UAE includes the following simple steps:

• Create an e-Services account: Create an e-Services account on the official Federal Tax Authority (FTA) website. 
• Fill out the VAT registration form: Provide detailed information about the business, including its legal name, business activities, projected revenue, and more.
• Provide the required documents: Submit a copy of the trade license, passport/Emirates ID (for UAE residents), and other relevant documents.
• Submit your application: Submit the form after completion and attach the specified documents.
• Receive your VAT registration certificate: The FTA will check the application. If they find everything in order, the VAT registration will be approved.

Understanding VAT-related Responsibilities for Businesses

Once your business is registered for VAT in UAE, there are certain responsibilities to ensure compliance with the regulations, such as:

• Charging VAT: As a VAT-registered business, you must charge 5% VAT on taxable goods or services being supplied.
• Reclaiming Input Tax: Your enterprise can reclaim any VAT paid on business-related goods or services. This process involves deducting the VAT paid on purchases from the VAT collected on sales and remitting the balance to the government. Here are the steps to reclaim input tax: some text
  • Calculate the total VAT paid on purchases.
  • Deduct this amount from the total VAT collected on sales.
  • The resulting figure is the amount to be remitted to the government.
• Keeping Records: You must keep detailed business records to allow the government to check that the process for different VAT purposes has been followed. These records include: some text
  • Financial records detailing every supply and import of goods and services.
  • All received tax invoices, tax credit notes, and corresponding documents.
  • All issued tax invoices, tax credit notes, and corresponding documents.
  • Details of goods and services that were used or disposed of for non-business purposes, including the taxes that were paid on them.
  • Information on purchases of goods and services for which input tax was not claimed.
  • Logs of supply of goods and services that have been exported.
  • Documentation of any modifications or amendments to accounts or tax invoices.
  • Documentation pertaining to any tax accounting frameworks employed.

The specified records should be retained for at least five years after the completion of the tax period. If the taxable entity has real estate, documentation related to the property must be kept for 15 years.

What Supplies Are Exempt from VAT in UAE?

As per the UAE VAT rules, some supplies are subject to the standard 5% rate, while others fall under two special categories: zero-rated and VAT-exempt. Understanding these categories is crucial for you to accurately calculate your VAT obligations.

Zero-Rated Supplies

Zero-rated supplies are taxable, but the rate of VAT is 0%. This means that while no VAT is charged on these supplies, businesses can still reclaim any VAT they have paid on costs related to these supplies. Here is a list of zero-rated supplies published by the UAE government:

• Export of goods and services.
• International transport of goods and passengers and transport-related services.
• Certain means of transport, such as trains, sea vessels, and aircraft, and goods and services related to such means of transport.
• First supply of residential buildings (lease or sale) within 3 years of finalizing their construction.
• Airplanes and marine vessels designed for the purpose of rescue or aid through air or sea.
• Certain precious investment metals.
• First supply of buildings specifically designed for charitable institutions (lease or sale).
• First supply of buildings that were converted from non-residential to residential units (lease or sale).
• Crude oil and natural gas.
• Educational services and associated services and goods.
• Necessary and preventive healthcare services and related goods and services.

VAT-Exempt Supplies

VAT-exempt supplies, on the other hand, are not subject to VAT. This means that businesses don’t charge VAT on these supplies and can’t reclaim any VAT they’ve paid on costs related to these supplies. Here is a list of VAT-exempt supplies published by the UAE government: 

• Certain financial services.
• Supply of residential units (lease or sale) if such supply is not subject to zero-rate.
• Bare land.
• Local passenger transport.

Partial Exemption

Certain cases of partial exemption exist where a business makes both taxable and exempt supplies. In such cases, the business can only reclaim VAT on costs related to the taxable supplies. While the preferred method for this division of costs should be the input tax ratio, businesses can use alternate methods if they are approved by the FTA.

What are the Penalties for VAT Offenses in UAE?

The UAE’s Federal Tax Authority (FTA) has established a range of penalties for VAT offenses as per Federal Law No. (7) of 2017 on Tax Procedures. Here are the different penalties 

• Late VAT Registration: Businesses that fail to register for VAT within the required timeframe can face a penalty of AED 10,000.
• Late VAT De-registration: Businesses that do not de-register within the specified timeframe can be penalized AED 10,000.
• Late VAT Return Filing: If businesses do not file their VAT returns on time, they can face a penalty of AED 1,000 for the first instance and AED 2,000 for repeated violations within 24 months.
• Incorrect Tax Return: Submitting an incorrect tax return can result in an AED 1,000 penalty for the first time, which will increase to AED 2,000 in case of repetition.
• Late VAT Payment: If businesses do not pay their VAT on time, they can face an immediate penalty of 2% of the unpaid tax. Then, a 4% monthly penalty will be charged after one month from the due date of payment.
• Failure to Keep Proper Records: Businesses are required to maintain proper books of accounts. Failure to do so can result in a penalty of AED 10,000 for the first time, which will increase to AED 20,000 in case of repetition.

How Can Expense Management Software Help with VAT?

Managing VAT can be a complex task for businesses, especially when dealing with a multitude of receipts and transactions across various formats. This is where expense management software like Alaan offers a great solution. It simplifies the process of VAT management, making it easier for your company to stay compliant with UAE VAT regulations.

Here is how Alaan can help:

• Automate VAT Capture and Categorization: Alaan can automatically extract VAT information from scanned receipts and categorize them according to the VAT rate. Whether it’s standard, zero-rated, or exempt, Alaan ensures that every transaction is accurately classified.
• Reduce Errors and Improve Accuracy: Manual data entry is prone to errors, which can lead to costly mistakes. Alaan minimizes these errors by automating data capture and calculations. This not only saves time but also improves the accuracy of your VAT records.
• Simplify Receipt Management: As per UAE VAT regulations, businesses are required to maintain records of receipts. Alaan simplifies this process by enabling you to store electronic receipts easily. This not only makes record-keeping more efficient but also ensures that you’re always ready for a VAT audit.
• Gain Real-Time Expense Visibility: Alaan provides real-time visibility into your spending patterns. This allows businesses to identify areas for cost savings and make informed financial decisions.

With a robust expense management software like Alaan, your enterprise can significantly simplify the process of managing VAT. It not only ensures compliance with government rules but also helps streamline your financial processes. If you are interested in learning more about how Alaan can help your business with VAT management, connect with our experts now.