Four things you need to know about VAT registration in the UAE
The UAE introduced VAT – value-added tax – in January 2018, at the standard rate of 5%. Although VAT will be fantastic for the UAE (providing revenue to improve public services and infrastructure) many business owners struggle with the idea.
Make mistakes and you could overpay – cutting your working capital, reducing cashflow and threatening innovation – or underpay – opening yourself to fines.
The VAT landscape isn’t as complicated as it first seems, though. Here are the four things you need to know to ensure your business is well-prepared.
1 - Not every company needs to pay VAT
Only companies with taxable supplies and imports exceeding AED 350,000 per year need to register for VAT in the UAE.
You only need to register for VAT in the UAE if your company has more than AED 350,000 each year in taxable supplies and imports. That’s assessed on the basis you either exceeded that limit in the preceding 12-months or you expect to exceed the limit over the next 30-days.
If your taxable supplies and imports fall under this threshold but exceed AED 187,500 you can choose to register for VAT but you don’t have to.
Knowing when to register – or deciding when to voluntarily register – is complicated. If you don’t register when you should, for example, you’re subject to penalties and fines. Equally, voluntary registration can be a positive – opening the door for tax refunds or offset expenses – but it can also be an unnecessary hassle and cost.
Seek advice from VAT experts to help you understand the nuances of VAT registration. What if your company makes under the threshold most of the year, but exceeds the threshold in the last month, for example? What if you predict you’ll exceed the threshold but don’t?
There’s also an administrative burden associated with VAT, as you’ll need to complete VAT returns correctly and on-time. VAT specialists ensure you’re ticking all the right boxes to maximise your working capital but also safeguard against risk.
2 – Not all goods and services are subject to VAT
Not all goods and services are subject to VAT, so it’s not a blanket charge for every business.
Some goods and services are considered exempt or zero-rated from VAT, which means you won’t pay any VAT on them (and can’t charge customers or claim VAT back on goods and services you’ve paid for).
Zero-rated goods and services include, for instance, some educational services; some investment-grade precious metals; export outside the GCC; some healthcare services. VAT-exempt sectors include bare land, residential property and local passenger transport.
The complication is, exempt goods and services are exempt from VAT completely but zero-rated goods and services are still considered VAT taxable at 0%. This means you must record all zero-rated supplies within your VAT record-keeping as usual. Zero-rated supplies also count towards your AED 350,000 threshold total.
Even more complicated, if you only make supplies that are zero-rated you can apply for VAT registration exemption, but if you make any other supplies, you must register for and record VAT.
These nuances mean most business owners do best to work with VAT experts who can advise where your liabilities lie. That’s especially true if your business supplies or buys products that don’t fit neatly into the standard VAT category. If you don’t get this information right, you could wind up overpaying – threatening your cash flow – or underpaying – opening you to fines.
3 - There are no plans to raise VAT
Standard VAT in the UAE is only 5% - one of the lowest in the world – and there are no current plans to increase this rate.
The standard VAT rate in the UAE is 5%, making the UAE one of the most tax-efficient landscapes in the world. For instance, France charges 20% VAT, China 17%, Russia 18%, Sweden 25%, the United Kingdom 20%.
It’s also heartening to note that there are no plans to increase the UAE VAT rate beyond 5%. If you’re not currently over the obligatory AED 350,000 threshold but you are over the voluntary AED 187,500 threshold, this might persuade you to register voluntarily.
Working with a VAT specialist can help you decide whether to register voluntarily, and also provide total visibility over your future costs. That way, you know in advance what VAT will mean for your business so you’re never caught unaware. Better financial planning means you never pay more or less than you should.
4 - Some free zones are exempt from VAT
Sometimes registering for VAT isn’t the best move – and VAT-exempt free zones could be the answer.
Depending on your customers, charging VAT can sometimes be damaging to your brand. If you sell to businesses they’re likely already registered themselves and can claim back VAT you charge them. In that situation, you charging VAT makes no difference.
If, however, you sell direct to customers or smaller businesses like SMEs, they might not be VAT registered. In that case, they can’t claim back VAT against your products or services, which makes everything you offer 5% more expensive.
If you’re in a situation like that – or you simply want to avoid the extra hassle of VAT registration and compliance – you can choose to locate your business in a VAT-exempt free zone.
Good tax specialists understand the nuances of business, so they can help you understand whether that’s the right decision for you.
For example, if your company is already located elsewhere it might not be worthwhile to move. VAT specialists can help you calculate the pros and cons of different strategies, to help you make better business decisions and meet your tax liabilities.
Virtuzone has especially designed a variety of business support packages to help business owners in the UAE advance and succeed. Sign up for our in-house VAT registration service, and let our dedicated team take care of your VAT registration as well as apply for your Tax Registration Number.