What is VAT?
It’s consumption tax, collected at each supply chain. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to the government reflect the “value add” throughout the supply chain.
Registering for VAT
A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
VAT-related responsibilities of businesses :
All businesses in the UAE need to record their financial transactions and ensure that their financial records are accurate and up to date.
Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) are required to register for VAT.
Businesses that do not think they should be VAT-registered should maintain their financial records in any event, in case we need to establish whether they should be registered.
VAT-registered businesses generally :
- Must charge VAT on taxable goods or services they supply;
- May reclaim any VAT they’ve paid on business-related goods or services;
- Keep a range of business records which will allow the government to check that they have got things right
If you are a VAT-registered business you must report the amount of VAT you’ve charged and the amount of VAT you’ve paid to the government on a regular basis. It will be a formal submission and it is likely that the reporting will be made online.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to the government. If you’ve paid more VAT than you’ve charged, you can reclaim the difference.
VAT in real estate :
The VAT treatment of real estate depends on whether it is a commercial or residential property. Supplies (including sales or leases) of commercial properties are taxable at the standard VAT rate (i.e. 5%).
On the other hand, supplies of residential properties are generally exempt from VAT. This ensures that VAT does not constitute an irrecoverable cost to those who buy their own properties. In order to ensure that real estate developers can recover VAT on construction of residential properties, the first supply of residential properties within three years of completion at the time of VAT introduction is zero-rated.
VAT will be charged at 0% in respect of the following main categories of supplies:
- Exports of goods and services to outside the GCC
- International transportation, and related supplies (flight ticket)
- Supplies of certain sea, air and land means of transportation such as aircrafts and ships (Logistics)
- Certain investment grade precious metals (No vat for gold, silver, of 99% purity)
- Newly constructed residential properties, that are supplied for the first time within three years of their construction
- Supply of certain education services, and supply of relevant goods and services (Education no vat)
- Supply of certain healthcare services, and supply of relevant goods and services (Healthcare, no vat)
VAT- exempt sectors
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation) - Check
- Residential properties
- Bare land - No land vacancy
- Local passenger transport - No VAT for RTA
Where a VAT registered person incurs input tax on its business expenses, this input tax can be recovered in full if it relates to a taxable supply made, or intended to be made, by the registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt supplies), the registered person may not recover the input tax paid.
In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable (exempt) supplies.
Businesses will be expected to use input tax (ratio of recoverable to total) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.
Government Entities and VAT purposes
Supplies made by government entities are typically subject to VAT. This ensures that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. Certain government entities are entitled to VAT refunds – this is designed to avoid budgeting issues and provide a level playing field between outsourced and insourced activities.
For the supplies provided for government entities, the treatment of such supplies depends on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard tax rate, the treatment will remain the same even if it is provided to a government entity.