How Will VAT Work for Small Businesses in UAE?

Tax is the main income source of any country. Therefore, the countries formulate stringent norms to calculate tax and ensure that the entities and individuals are paying tax meticulously.

Value Added Tax (VAT) is a form of taxation followed in more than 150 countries around the globe. Organizations specialized in VAT services in Dubai can help entities to submit VAT returns without fail. And thus avoid unwanted repercussions.

The United Arab Emirates implemented VAT in Jan 2018 to improve the financial strength of the nation. It has imposed 5% of the VAT on taxable goods and services in each stage of services.

Even though the tax burden is on the consumer, it is the business firm’s responsibility to calculate VAT and file VAT returns judiciously. As the calculations are complicated, most firms have in-house accounting teams to monitor the transactions and file tax returns.

Outsourcing VAT services in Dubai to professional accounting firms can resolve your burden to a remarkable extent. With the introduction of VAT in the UAE, small businesses are also required to register for VAT even if they do not reach the registration threshold of Dhs 375,000.

If you think that you are a small business owner who may not reach the mandatory turnover threshold for registration, you are wrong. VAT’s optional registration threshold for small businesses is AED 187,500 if you are paying a considerable amount of VAT on your expenses and overheads.

This would enable you to reclaim VAT paid expenses, notably if you have large ticket items.

Which are the Businesses Affected by VAT?

The VAT regulations in the UAE states that firms with a turnover of AED 375k must register for VAT. At the same time, the minimum threshold for considering VAT is AED 187,500, which is the turnover for optional registration for VAT.

VAT is applicable to all Mainland companies and Freezone companies. However, it doesn’t mean all the Freezone companies have to register for VAT. Those companies that operate in designated Freezones, approved by the Ministry of Economic and Commerce of the UAE, need not pay VAT for their goods and services.

The Federal Tax Authority (FTA) of the UAE is the authorized agency to monitor, inspect, and audit firms for compliance of VAT norms. The calculation of the VAT depends on the difference between Output Tax and Input Tax.

That is the tax received from the firm’s goods and services and tax paid for the subject services. You are required to pay the extra amount you received as an Output tax to the authority.

In case you have paid more input tax than the output tax, you can file a return for a refund of the additional amount.

VAT Covered Products and Services

The standard rate of VAT in UAE is 5% since its implementation on most of the business products and services. However, a good number of goods and services, which are considered crucial in the economy, are exempted from VAT. Those products and services are either exempted from VAT or charged a 0% rate.

The difference between the 5% rated and 0% rated goods and services is that the suppliers of zero-rated products or services can recover the VAT they’ve paid on items into their business.

On the contrary, suppliers of zero-rated goods and services don’t need to register for VAT at all. In case they register for VAT, they can’t reclaim any VAT they’ve paid on items.

Zero rate

The zero-rate VAT in UAE includes the export of goods or services outside the GCC, especially education, healthcare, medical equipment, and supply of commercial aircraft, buses, and trains.

The international transport services for both passenger conveyance and good are also covered under the 0% rate VAT.

Certain investment grade precious metals, crude oil, natural gas, newly constructed or converted residential properties, etc. are also included as part of the zero-rated VAT in the United Arab Emirates.

Why the VAT Calculations Complicated?

VAT calculation has to be undertaken on each stage of providing goods and services. The VAT is 5% at every stage. The calculation of the same will turn confusing, considering the volume of the task involved.

A specific team must be required to monitor the VAT and make necessary entries in registers or the system.

VAT Calculations

As the task is not limited to a particular transaction, the calculation may turn erroneous. Therefore, the entities need to formulate an effective method for the constant accounting of VAT.

The administrative activities for confirming the calculation and avoiding mistakes may become a burden for the accounting teams, as they are loaded with other tasks too. In addition, the VAT period will vary with an increase in sales and growth of the organization.

There are the latest software and professional accounting firms in Dubai to support you through the process. Outsourcing the task of VAT services in Dubai may be a highly rewarding option.

When Do You Need to File VAT Returns?

Ideally, you must file VAT returns on a regular basis. The Federal Tax Agency has stipulated the timing for VAT return to be within 28 days of the tax period.

Further, the agency may ask for a different period of VAT filing for certain types of companies. It may be noted that failing to file a tax return can lead to hefty fines and penalties, in addition to the embarrassment and loss of credibility of the firm.

The tax period fixed by the authorities are as follows:

  • End of every quarter for business with turnover less than AED150 million, in a fiscal period
  • Every month for businesses with turnover more than AED 150 million, in a fiscal

VAT Guide for Startups

  • Since small businesses can become great players in the industry, VAT registration in UAE is prominent. An excellent way to build a steady client base is to perform and present your business as an established one.
  • Businesses in the UAE, including startups, Limited Liability Companies, and sole traders, have to be registered for VAT if the taxable turnover of the last one year exceeds the VAT threshold. Also, the threshold for the mandatory UAE VAT registration is Dhs 375,000.
  • A startup has to undergo VAT registration when it anticipates to reach the turnover threshold in the next one month period (30 days).
  • A business can deregister for Vat if the taxable turnover is beneath the compulsory VAT registration threshold of Dhs 375,000.
  • The standard VAT rate in UAE is five percent, while services and products are exempted from VAT or zero-rated. If your business is VAT registered in UAE, it needs to pay VAT for all the eligible sales.
  • For those businesses registered for VAT can reclaim VAT for business purchases.
  • Notify your customers regarding the vat registration. Businesses are liable to charge vat on the products and services. Also, the invoices should include the vat amount imposed.
  • Those who are not registered for VAT in the UAE cannot claim VAT for their business purchases.
  • Businesses registered for VAT are liable to file the VAT returns regularly. The authorized tax agents in the UAE can help you keep track of the accounts and file VAT returns on time without putting an additional burden on your business.
  • Small businesses that haven’t entered the obligatory VAT registration threshold can use voluntary vat registration. You can voluntarily register for VAT in UAE if your yearly taxable supplies lie between Dhs187,500 and Dhs 375,000.
  • Voluntary registration for VAT allows startup businesses not to worry about reaching the mandatory threshold for mandatory VAT registration and missing to inform the tax authorities.

Cash Flow of a Particular Business

The credit payment terms are known to be greater than one month in the UAE. In case if it is longer than three months or a period of 90 days, then the cash flow problem will occur. Small businesses may need to seek funding if they cannot collect payment from goods or services supplied within a particular time period.

This would also enable them to perform quarterly VAT payments. Hence it is desirable for small businesses to ensure better controls on payments from their customers. Once a company is registered, you need to pay VAT on your domestic sales.

Need for Accounting System

An accounting system is suggested for small businesses registering for VAT in the UAE. Using an accounting system helps you to collect and track the information related to the quarterly return of VAT.

The collection process would be troublesome and less effective if businesses send invoices via hand-written bills or word/excel. Experts suggest using cloud-based accounting software to tackle your VAT details and business cash flow in this technology-embraced world.

The entities have to make sure that they are filing the correct VAT returns. Every transaction has to be documented for the same. The FTA is authorized to carry out audits and inspections to verify the documents for correctness.

Hence, every bill, certificates, and receipts must be maintained, which will be sought by FTA to verify authenticity.

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