Key considerations while planning for VAT in the UAE
VAT in the UAE will be introduced from January 1, 2018, and is expected to generate in excess of AED90 billion in tax proceeds annually. The introduction of VAT naturally presents a number of challenges for businesses operating in the UAE, and as much of the legislation is yet to be finalised, the full impact of VAT is still relatively unclear.
Developing an effective VAT implementation strategy will enable businesses to be well-positioned for the introduction of VAT, in terms of compliance, reducing risk, and managing cash flow. This article explores the key factors for businesses to consider when planning their approach to managing the introduction of VAT next year.
VAT registration in the UAE will initially be compulsory for companies with an annual revenue in excess of 375,000AED, while businesses with an annual revenue in excess of 187,000AED have the option to register. Whilst some sectors such as education, medical care, and certain financial services will either be exempt or be zero rated, the majority of other goods and services will be subject to the new tax at 5%.
The Federal Tax Authority (FTA) have launched a website to assist businesses in better understanding the implications of VAT and the steps required to meet the challenges of the implementation.
Impact of VAT
VAT is likely to have a significant impact on almost every area of every business in the UAE, and will affect every stage of the supply chain; from contracts, procurement, and production, to IT systems, sales and marketing, and even human resources. Understanding exactly how each of these areas will be affected by the introduction of VAT is critical to effective implementation, and to reduce the risk of operating issues in the future.
A practical point of consideration at this stage is that the day to day tasks of any companies’ personnel are likely to change as a result of the introduction of VAT. Whether it’s the financial team who will now be responsible for identifying recoverable VAT, or the sales team who will have to consider VAT in each of their new proposals, it is imperative to determine how to train and prepare staff for these changes.
Managing VAT will likely require significant resources, and therefore organisations should invest time to identify any skills shortages within their teams in advance to ensure that these can be addressed efficiently. It may be necessary to leverage external resources, such as a VAT specialist or management consultant, which should be procured as far in advance as possible. If an organisation doesn’t have the knowledge or physical resources to manage VAT effectively, then it runs the risk of facing non-compliance penalties, and ultimately loss of revenue.
Existing IT systems will have to be modified to incorporate all aspects of VAT implementation, whilst minimising interruption to the present business operation. From reporting and accounting systems to point of sale terminals, it is likely that updates will be necessary to all platforms.
Naturally, the introduction of VAT is likely to have an adverse impact on cash flow. It is possible though to minimise the impact by carrying out a comprehensive audit of the current invoicing and collection systems within the business, and identify ways in which to improve the recovery time of VAT on costs, and/or defer the payment of VAT due.
A VAT invoice is required for all business transactions, as evidence of the sale of goods or services in compliance with the VAT law. Without a VAT invoice it is not possible to re-claim VAT.
Review Contracts & Agreements
As soon as possible, all contracts and agreements with both customers and vendors should be reviewed to ensure that VAT has been appropriately addressed and that each parties’ VAT obligations and entitlements are reflected. Identify long-term contracts that may be adversely impacted by VAT and initiate renegotiation where possible.
VAT registration in the UAE will be compulsory for companies with an annual revenue in excess of 375,000AED. Failure to register for VAT or to submit a comprehensive tax return will lead to serious and costly penalties for both the business and the business owner.
Regulations are yet to be finalised
Whilst VAT is expected to be introduced in the UAE in just over two months, much of the VAT legislation is yet to be finalised. For instance, we are yet to understand what the VAT return will look like, it is unclear exactly how businesses will be able to re-claim VAT, and we are uncertain how VAT will be applied to the UAE’s many free zones. As such, it is likely that businesses will have to react extremely quickly to changes as they are announced, in order to comply with new regulations. Ensuring that an effective implementation strategy is in place will enable businesses to better prepare for and react to these changes.
Jane Ashford is the Managing Director of PRO Partner Group. As an expert in company formation, Jane has gained extensive experience in her field over the past decade and has built solid relationships with trusted partners and organisations around the globe. For any information on how PRO Partner Group can assist with establishing your business in the Middle East, please contact Jane on firstname.lastname@example.org or call a member of the team on:
+971 (0)4 456 1761 (Dubai) +971 (0)2 448 5120 (Abu Dhabi) www.propartnergroup.com