Understanding VAT in the UAE – An Essential Guide

Ever since its introduction in the UAE in 2018, Value Added Tax has played a significant role in shaping the economy of the country. This indirect form of tax is applied to most goods and services, which eventually affects both the business as well as the consumer. Hence, it is essential to understand how VAT in UAE works, what are its key rates and latest rules, which goods are exempted from VAT, and more, regardless of whether you are a buyer or a seller.

VAT in UAE: Explained

Value Added Tax or VAT was launched in the United Arab Emirates to diversify the economy, generate more sources of revenue for the government, and reduce its dependency on oil profits. This will aid in supporting public services and infrastructure, thereby solidifying the economic stability and growth of the UAE.

Eligibility for UAE VAT

In UAE, the eligibility for VAT registration is determined based on the annual taxable turnover of the organization.

·         Mandatory registration – for businesses with an annual taxable turnover above AED 375,000

·         Voluntary registration – for businesses with a turnover or expenses over AED 187,500 but below AED 375,000

Benefits of VAT in UAE

Some of the key benefits of UAE VAT are as follows:-

• Cost saving – VAT helps businesses save costs by claiming input tax credits. This allows them to balance the VAT paid on purchases against the VAT collected on sales.
• Financial management – UAE VAT promotes better financial management. It mandates all VAT-registered businesses to maintain accurate records and submit regular VAT returns.
• Eligibility for VAT refunds – When the input VAT of a business exceeds the output VAT, they can apply for refunds. This feature provides them with financial relief during growth stages or after major investments.
• Fair and transparent taxation – VAT enhances transparency and reduces opportunities for tax evasion by ensuring an unbiased distribution of the tax burden across the supply chain.
• Improved efficiency of business – With the introduction of VAT, businesses are encouraged to upgrade their accounting systems, resulting in more efficient operations.
• New market opportunities – As UAE VAT is a complex system, businesses need expertise and guidance to proceed with caution. This creates opportunities for advisory firms and consultants who specialize in VAT services.
• Non-financial benefits – There are many non-financial perks of implementing VAT in UAE, such as improved government accountability and liability management, reduction in fraud, corruption, and wastage in the economy.
• Economic growth and infrastructure – The revenue generated from VAT aids in maintaining the economic stability of the country and improving the infrastructure, thus facilitating easier and more profitable business operations.
• Encouragement of savings and investments – VAT is a transparent and staged tax that promotes personal savings and investment and also curtails the immediate financial impact on consumers.

Types of VAT in the UAE – Key Rates

There are different rates of VAT in UAE decided on the basis of the nature of the goods or services. 

Standard rate (5%) – Under this category, a 5% VAT will be applied to all goods and services.

Zero-rated – Goods falling under this category attract 0% VAT, such as few education services, healthcare supplies, goods and services exported outside the GCC, precious metals such as gold and silver, international transportation, etc. However, taxpayers are allowed to claim input tax paid on the purchases.

Exempt – These goods and services are completely exempted from VAT, and neither can businesses claim input tax. These supplies include residential properties, bare lands, public transport services, life insurance, and certain financial services.

Latest VAT regulations in the UAE

Even at present, the UAE has continued to maintain its standard VAT rate of 5%, ensuring financial stability in businesses. However, there have been new reforms and amendments in the UAE VAT law, such as – 

• Credit Note Regulations: VAT credit notes must be declared within 14 days by businesses. Previously, it was for 90 days. This change will ensure quicker adjustments in VAT records while dealing with returns, discounts, or invoicing errors.
• Stricter Compliance: There are stringent rules for issuing tax credit notes. Moreover, the processing time of refunds related to these notes has also been minimized.
• Zero-Rated Supplies: Companies dealing exclusively in zero-rated supplies can now apply for VAT exemption. However, they need to continue adhering to other VAT obligations unless officially exempted.
• Tax Audits: As per the new reforms, the FTA can extend the audit period up to four years under certain conditions. Previously, it was up to five years after the relevant tax period.
• E-invoice: The government of UAE has authorized e-invoices for cross-border transactions, effective from 2025.

With these amendments, the UAE government aims to streamline VAT processes and enhance compliance and overall efficiency of VAT administration in the UAE​.

Registering for VAT in the UAE

VAT registration is a crucial step for companies engaging in taxable activities. Here’s a brief guide on how you can register for VAT with the FTA:-

Determine VAT eligibility

Before approaching the FTA, determine whether you are eligible for VAT registration, based on your annual turnover. If your turnover for the previous year is above AED 375,000, then you need to register for VAT. Nevertheless, if it is below the specified threshold, then you can opt for Voluntary registration.

Prepare necessary documents

Now, gather all the necessary documents required for the registration process. For instance, company license, passport copies of the business owners, description of business activities, proof of business transactions, details of the annual turnover, etc.

Apply for VAT registration

As registration is done online through the official portal of the FTA, you need to visit the website and create an account. Further, fill in the VAT registration form with all the relevant details about your business and financial transactions along with the requested documents. Double-check all the details and credentials for accuracy and then submit the application.

Obtain a TRN

After submission, the application will be reviewed by the FTA within two to three weeks. If approved, the FTA will issue a Tax Registration Number (TRN) to the company, which shall be further used for tax purposes.

Compliance and bookkeeping

Once the company is registered for VAT with the FTA, it must ensure to maintain compliance with the UAE VAT laws, such as accurate record-keeping, timely filing of VAT returns, etc. It must also make sure to file VAT returns before the stipulated deadline to avoid any fines or penalties.

Documents required in the VAT registration process:-

• A valid Trade license
• Copies of Passport and Emirates ID of the company owner/partners
• Memorandum of Association (MOA) if required
• Contact details of the company, such as registered address and P.O. Box.
• Contact details (mobile number and email) of the individual responsible for VAT matters
• Bank details, such as account number, account name, bank name, branch name, and IBAN.
• Turnover declaration for the last 12 months (attested and notarized)
• Declaration of any export or import activities
• VAT Registration Letter (if the business deals with customs)

It is important to note that companies will be subject to legal fines if they fail to comply with the VAT regulations. For late filing of VAT returns, they may have to pay a fine of AED 1000. However, if the non-compliance continues for more than 20 years, the fine would be double the imposed amount. On the other hand, delayed VAT payments may lead to a penalty of 2%of the unpaid tax, increasing over time.

Conclusion

Thus, it is very crucial to understand the fundamentals of VAT in UAE  in order to manage your finances effectively and stay away from any legal repercussions. Staying updated and informed with the VAT laws can help you achieve this compliance, thus simplifying VAT management within the organization. So, stay alert and plan strategically to avail maximum benefits of the UAE’s VAT system.

For more info, contact Shuraa Tax Consultants and Accountants.