VAT q&a: My Abu Dhabi start-up now qualifies for VAT. Can we reclaim any tax paid before registration?

The company has crossed the earnings threshold of Dh375,000 and is unclear on what it can claim

We are a UAE startup, whose sales for the first year did not cross the UAE VAT threshold of Dh375,000. However, recently we realised that our sales will exceed the threshold in the next 30 days. Therefore, while we did not charge VAT for the first 10 months, we will now be charging it. We have heard we can reclaim the entire input VAT paid before registration. Is this process acceptable to the Federal Tax Authority? We did not register in the first few months of operation as were unsure we would cross the threshold. HJ Abu Dhabi

Article 56 of the Decree Law allows the recovery of input tax paid on goods, services and imported goods prior to the date of VAT registration, “provided that these goods and services were used to make supplies that give the right to input tax recovery upon tax registration”. Input VAT is the VAT you are charged by your suppliers on goods and services purchased.This means that you can only recover VAT paid before registration if VAT charged on the same goods and services post registration would be recoverable. You should understand the exclusions to input tax recovery contained in the full decree law and executive regulations and apply the same rules that apply to input VAT recovery generally, when determining how much pre registration input VAT can be offset. 

There are four exceptions to this rule listed in the decree law. The first is receipt of goods and services for purposes other than making taxable supplies. The next is for input tax related to capital assets that are already partially depreciated before the date of registration, for example, if you purchase a fixed asset with an expected life of five years and when you register for VAT the asset has only two years of use left, you can only reclaim two fifths of the VAT you originally paid. The third exception is for services received more than five years prior to the date of registration. Note this refers to services only, rather than goods and services. 

Finally you cannot reclaim input tax paid if you have moved goods to another implementing GCC state prior to the registration in that state. This is because if you supply goods to another GCC state then the recovery of input tax is permitted only in that other state. Therefore, to recover input VAT you need to be registered in that other GCC state.

have read about UAE companies receiving invoices without UAE VAT, where such companies need to record the VAT under the reverse charge mechanism. In such cases, this means the FTA will not receive any VAT. Is it logical that some non-resident companies are obliged to register for and charge VAT but others do not? Is there ambiguity in the law here? HJ Abu Dhabi

 

This question highlights why the reverse charge mechanism is a hard concept to grasp and at first does not seem to make sense. The reverse charge mechanism applies if you make input and output VAT adjustments on your VAT return where you have purchased goods or services from an overseas company and have not been charged VAT. 

When considering this, remember the end consumer bears the cost of VAT not the companies involved in the production chain. The companies have to charge VAT, but can also reclaim any VAT they are charged.

If a UAE resident company is purchasing services from another UAE resident company, and both are VAT registered, then the supplier will charge the recipient company VAT and will pay this over to the FTA on their next return. Meanwhile, the recipient company will pay the supplier VAT but will then reclaim this from the FTA on their next return. So from the FTA’s perspective, there is a zero net effect from this transaction, albeit that there are equal and opposite actual cash flows.

If a UAE company buys services from an overseas company that is not registered for UAE VAT, the UAE recipient company must use the reverse charge mechanism when accounting for this VAT. They will record equal and opposite VAT payable and VAT reclaimable on their VAT return. As these amounts net each other off on the same VAT return, there will not be any actual movement of cash, but the zero net effect is the same. So there is no ambiguity in these two scenarios, the net effect for both the FTA and the UAE-registered company is the same.

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UAE government clarifies VAT liability on pre-2018 business contracts

Federal Tax Authority says customer liable only if contract said amount was “exclusive of tax”

The UAE’s Federal Tax Authority (FTA) issued a clarification over VAT liability pertaining to contracts issued last year, laying to rest residual questions over whether businesses or consumers are liable in such cases.

“The only case where consumers are directly responsible for paying VAT on received services that are delivered fully or partially after VAT went into effect, is where the contract, issued before 1 January 2018, states that the amount due is exclusive of tax,” the FTA said in a statement to media.

Earlier this year a dispute broke out between health club Fitness First and its members in the UAE, over VAT being applied to membership agreements signed and paid for last year.

Many members complained about requests from the company to pay the tax for the 2018 portion of their membership, even though they had already paid the cost of their membership according to Fitness First’s 2017 prices, which did not include VAT.

The dispute prompted Ahmad Al Zaabi, acting director of consumer protection at Dubai Economy, to clarify the rules.

“The agreement should state that the fee applicable does not include VAT or any of the tax concerned, and also specify that the merchant reserves the right to charge VAT or any other tax that may be implemented in the country at any point during the agreement period,” Mr Al Zaabi said in a statement in January.

If such terms are not stipulated, the contact will be considered “silent” and the merchant “cannot charge VAT from the consumers, or gain an accepted settlement with their consumers”.

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VAT has not impacted deal flow, according to experts

Among the sectors identified as significantly affected by VAT are construction, real estate and export industries

 

The implementation of 5 percent value-added tax (VAT) in the UAE and Saudi Arabia has not impacted deal flow in the GCC, even as many companies found themselves unprepared, according to experts speaking at the Institute of Chartered Accountants in England and Wales (ICAEW) corporate finance faculty roundtable in Dubai.
According to the panellists, despite the fact that the flows of deals was not impacted there remain uncertainties regarding the items subject to the tax, as well as a “sentiment of denial” across businesses that affected their ability to be ready on time. Now, however, businesses are embracing VAT.
“We are living in a very exciting period,” said Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA). “There is no doubt that VAT implementation will improve business conditions and create more stable economies over the long run.”

The panel noted that many businesses do not have access to consultants with VAT experience, which means that smaller businesses with no access to tax advice are struggling with the compliance processes.
The panellists added that while some businesses experienced a negative consumer reaction to the implementation of VAT, it is likely to only be a short-term effect that is negated by the positive long-term economic impact of VAT.
Among the sectors that the panellists identified as significantly affected by VAT are the construction, real estate and export industries. They noted that because of the long tenure of construction projects, businesses with existing contracts hadn’t factored in VAT when planning and found it difficult to pass the cost of the tax onto their customers.

Many panellists applauded the UAE government’s efforts to provide guidance to make the tax’s implementation process as simple as possible for stakeholders.
“As a young legislative body, it’s tough for the UAE tax authority to address all concerns raised by businesses,” Armstrong added. It has been a hasty incorporation process, but as time unfolds, VAT will create a more transparent, credible and internationally accepted economy.
“Time will tell whether this increased transparency will make the UAE more or less competitive,” he added.

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Businesses must comply with VAT

Businesses across the UAE must comply with the value added tax (VAT) law by filing their returns on time, experts at a session on VAT returns and reporting stressed.

Organised by the Institute of Chartered Accountants of India (ICAI) Dubai Chapter, the session provided clarity on the process of filing returns, as well as registration for businesses that have not done so yet.

"In the beginning it was challenging for the businesses to register for VAT, as it was new for everyone," said Naveen Sharma, chairman, ICAI Dubai Chapter. "But, with time and clarifications from the Federal Tax Authority (FTA), the businesses started getting their doubts cleared which helped them in the registration process. I think, as of now, all big organisations have already registered for VAT, but some small businesses in the market are still struggling with registration process. In due time, I think they will also be able to register themselves."

Asked about how clear businesses are on filing returns, Sharma said that the VAT return form is very clear. "Guidelines issued by the FTA helped a lot in getting the clarity. But, businesses are facing some difficulties like getting the right invoices on time, reports from the system, etc. In due time and experience, I feel these issues will be resolved and businesses will get comfortable with VAT concepts and returns."

Similarly, Mansoor Sarwar, regional director of Technical and Pre-Sales at Sage Middle East, noted that larger corporations and multinationals have handled VAT-implementation well, as they prepared well in advance. "It is the small and medium businesses who are finding the process overwhelming. The majority of smaller companies we have spoken to are only somewhat prepared or are not prepared at all for VAT. A lot of them are still uncertain about how to get their accounting and business systems ready, and have not gotten their employees trained for VAT-compliance."

The learning curve, he said, is steep for a lot of small and medium companies, especially with regards to how to returns-filing, refund claims or how to conduct tax audits. "The simplest solution is to implement an internationally-recognised accounting software which is VAT-compliant. Find a software provider with prior VAT-implementation experience. Companies should also use a registered tax agent for support during this transition. Lastly, it is important that businesses remain proactive when it comes to VAT, and take the necessary steps to be ready."

Asif Master, director of Finance at Al Shirawi Group, added that the FTA has recently waived administrative penalties for non-registration till April 30, 2017. "We feel that it has been done so that those businesses who are left behind can catch up with the VAT registration. It is a welcome and positive move by the FTA to consider the difficulties being faced by the small and medium size businesses. Due to lack of preparedness and time many business could not register well within timeline."

"We recommend all the businesses to read the return filing guide released by the FTA," he added. "It is a nice and detailed document which explains what should be reported in each field of the return. Key is to check if all your transactions which took place during the month are properly captured and reported in the return. Export and exempt supplies are tracked separately and reported in the return. In case of imports, whatever is not included in the auto populated value in the FTA return, ensure you report it in the adjustment columns. Input credit should be claimed only which is allowed as per the rules in the return."

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UAE approves first batch of tax agents

 

Federal Tax Authority says agents will be 'key contributors to the successful implementation of the tax system in the UAE

The Federal Tax Authority (FTA) has approved the first batch of registered tax agents, after meeting the required standards, conditions and qualifications, in addition to passing the authority’s tests.

Khalid Al Bustani, FTA director-general, said that agents are "key contributors to the successful implementation of the tax system in the UAE".

The agent may represent any entity or individual before the Authority, helping them meet their commitments and know their rights, state news agency WAM reported.

The registration of the first tax agents comes just weeks after the UAE launched value added tax (VAT).

Tax agents strengthen ties between the FTA and taxable individuals, he said, revealing that the authority is about to register a second batch.

They aim to help businesses achieve tax compliance, manage records, and avoid errors in registration and the filing of tax returns.

 ''Tax agents will play an important role in tax compliance, and as strategic partners for businesses, represent them in businesses entities and fulfil their tax obligations toward the authority, tax agents will provide a lot of services to business sector." 

For More Information Please Contact Us HERE . 

VAT recovery in the UAE is another thorn in the process of reclaiming the tax

The introduction of VAT in the UAE and Saudi Arabia will have implications for conference and event businesses, as companies not registered for the tax in both countries will pay the levy when they hold events, according to a VAT recovery firm.

"For businesses that are not VAT registered in the region, both sets of legislation [in the UAE and Saudi Arabia] have indicated a mechanism is going to exist for businesses to make standalone claims to recover VAT they might have incurred on hotels, subsistence things like that when visiting the country on business meetings,” said Richard Barrett, head of consulting for the UAE at VAT IT.

The UAE and Saudi Arabia are the only two GCCcountries to introduce VAT at a rate of five per cent in January as a means to boost government revenue dented by low oil prices.

Companies around the world are losing out on $20 billion globally every year in unclaimed VAT, according to VAT IT. This is mainly due to the complex and time consuming European rebate system, which leaves businesses less inclined to recover the VAT they paid. The figure is high because more than one-fifth of companies who incur VAT in foreigncountries say they are unable to recover it, due to procedures being too complex and burdensome.

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VAT not eating into UAE residents 

eating out pot

'Most retailers decided to take VAT in their account to make customers more confident' 

UAE residents have not cut down spending on food and beverages following the implementation of five per cent VAT from January 1 as sales remain robust, retailers and distributors said.

Speaking on the first day of Gulfood at Dubai, senior retail industry executives said that most - if not all - of retailers absorbed VAT in order to keep regular customers and maintain their market share.

"Most of the retailers decided to take VAT in their account to make customers more confident. Whenever new taxes are implemented in any part of the world, there is a reaction initially but then people start accepting it. Same is the case here in the UAE," said Haresh Bhatia, country head for the OOH sector at Choithrams.

The UAE levied five per cent VAT on food and beverage products from January in line with its GCC agreement. This resulted in some major retailers announcing absorbing VAT as part of their marketing strategy to woo customers while others passed it on to consumers.

Bhatia said there was a little bit of concern initially but now people have taken it very positively because they know taxes are levied everywhere in the world by the governments to expand their revenues.

Profit margins vs VAT

Bhatia, however, rejected the widely-popular perception about high profit margins by the retailers.

"Margins have never been very high. This is a wrong concept that people have. Here 90 per cent of retailers are on a rental basis. It is just recently few years back that people starting buying outlet and started saving a little bit. The market is so compact and competitive, you find six outlets in one small area and this was not the case in the past. Every retailer wants to hold its customers because the cake is the same and every body wants a pie of it," he added.

During promotions, he said, margins shrink every further. "Sometimes retailers don't even make two per cent."

Neeraj Vohra, CEO of Unikai Foods, also rejected any impact of VAT as residents continue with their regular foods and beverages purchases. "There were some issues initially but we are quite optimistic about growth in 2018 and beyond. Since we are already into value segments, so wherever we could mange we absorbed VAT and where we couldn't, we passed onto consumers," Vohra said during an interview at Gulfood.

Usha Pagarani, partner at Al Maya Group, also denied any impact of VAT on sales, claiming that five per cent is very low. "With regards to VAT, we are very okay; every country has VAT and here it is only five per cent. We are very positive and food is a very good industry to be in," Pagarani said.

Bhatia of Choithrams said beverages and energy drinks sales have declined. "It is a phase which will go away. Within three months' time, sales - which have declined around seven to eight per cent - will be back to normal. In the UAE, be it a labourer, businessman or a common man, savings are still there for everyone."

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