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Small Businesses and VAT Compliance in the UAE
There is always some or the other kind of change when it comes to a country’s taxation laws, keeping in mind the changing business scenario. The same is the case with the UAE or the United Arab Emirates. The country, which is made up of seven emirates, is home to thousands and thousands of businesses or companies, all dealing with a multitude of operations. The country’s economy has been growing quite steadily in the past few years and thus offers business owners the possibility of earning high profits and returns, while the government regulations make it a smooth process setting up a business.
What is VAT?
VAT stood for Value Added Tax and was introduced in the UAE in 2018 and is currently 5%. Before being introduced in the country, it existed in other countries as well, especially in Europe. VAT refers to the consumption tax, which is added to a product after each stage of value addition. During the manufacture of a product, it goes through different stages, and every time it is sold, the consumer must pay VAT. According to the VAT laws of the UAE, every company that manufactures a product is obligated to register itself under the VAT norm and must charge VAT on the sale of its products. Moreover, a company is also obligated to pay VAT to any company upon the purchase of its products. VAT is an indirect consumption tax that adds to the government’s income. Since VAT is a relatively new concept in the UAE, there is still a lot of confusion pertaining to the issue, which includes VAT calculation, filing, etc. Any bookkeeping services in the UAE or accounting services in the UAE would be able to help you understand VAT norms as well as file your returns on time.
VAT Compliance for Small Businesses in the UAE
VAT is a new tax norm that was introduced in the UAE in the year 2018, and if you have set up your business in the country post that year, you would need to register for VAT. There are many doubts regarding VAT, and one such doubt is why you should register for VAT when you have just about setting up your company, and it operates on a relatively smaller scale. Here are some reasons why you should register for VAT:
- Check if You Have Already Met Requirements: The first thing to consider when thinking of registering for VAT is whether you have already met the requirements. If not, you must immediately work towards it.
- Avoid Any Penalties: As is the case with corporate tax, if you do not file tax returns on time, your company will have to face a penalty. Even with VAT, if you do not register for it and then fail to comply with the norms, you will face a penalty that can be quite expensive.
- Bad For Business: Since the laws require you to charge VAT on the sale of your products when you engage in business with other companies, you might be required to present your VAT registration number, and failure to do so might negatively impact your business.
When you look to register for VAT, your registration turnover over the past 12 months is a major determinant of the same. For instance, if you are in Dubai, then accounting services in Dubai or bookkeeping services in Dubai will be able to help you out. Here are the eligibility criteria:
- Mandatory Registration: Turnover of more than 375,000 dirhams over the past 12 months.
- Voluntary Registration: Turnover between 187,500 and 375,000 dirhams over the past 12 months.
- Not Eligible: Turnover of less than 187,500 dirhams over the past 12 months.
The following is how VAT works in the UAE:
- Output tax: As a company, you are required to charge your customers VAT on your products or services after adding the applicable rate to the invoice. This is output tax.
- Input Tax: When you buy products or services from other companies, you too will be charged VAT, and the rates shall be mentioned on the invoices. Keep track of this tax, which is known as input tax.
- Making VAT Payments: According to the FTA’s requirements, you will have to file and pay your taxes. The way to know how much you need to pay is subtracting the input tax from the output tax. In simpler words, the formula is- Due tax= Output tax- Input tax. In case you collect less than you pay, you are eligible for a tax credit.
Some important facts to keep in mind about VAT are:
- Input tax should be calculated only for the purchases which are made for business purposes and for those which are related to providing your customers with taxable goods or services.
- VAT is paid by the final consumer of the goods or services, and all you would be required to pay are the compliance expenses.
- You do not need to pay VAT on your profits, and your employees do not pay VAT on their salaries.
VAT is a requirement in the UAE, and as a company, you are obligated to comply with its norms. In case you do not understand what the requirements are, an accountant in Dubai or even a bookkeeper in Dubai (or anywhere in the UAE) will be able to help you.