Michael Armstrong, ICAEW Regional Director for the Middle East, Africa and South Asia, shares his top tips for UAE businesses to avoid financial penalties that may be imposed due to violations, errors or incorrect record-keeping
The United Arab Emirates and the Kingdom of Saudi Arabia began the implementation of Value Added Tax (VAT) on January 1, 2018 at the rate of five per cent, while other GCC countries are expected to follow in the near future. As VAT is new to the region, it is imperative for business owners to be aware and comply with the new regulations in order to avoid stiff penalties which could be as high as AED 50,000.
Seven tips for UAE businesses to avoid financial penalties that may be imposed due to violations, errors or incorrect record-keeping include:
Register for VAT
Every company offering taxable goods or services with an annual revenue of AED 367,000 and above is required to register for VAT. However, those with an annual revenue between AED 200,000 and AED 367,000 will have the option to register. The Federal Tax Authority (FTA) has stated businesses must register within the prescribed period, and failure to do so could result in non-compliance penalties as severe as AED 20,000. In addition, unregistered companies will be required to stop sales until they receive their tax registration certificate (TRC).
Record all transactions
The law requires businesses that meet the minimum annual turnover (as evidenced through financial records) to register and keep a record of all their business income, costs and other associated VAT charges, whilst ensuring all records are up to date. These records will be submitted to the FTA in Arabic.
However, it is advisable for businesses that do not meet the minimum annual turnover to maintain records of all transactions. Supposing the FTA arrange an inspection to determine whether or not your company should be registered for VAT, these records are the only means of evidence to make decision. Otherwise, this may be seen as noncompliance, which would lead to penalties.
Every business essentially plays the role of a tax agent, collecting on behalf of the government VAT on goods and services purchased by their consumers. Failure to collect this VAT may result in up to five times the amount of VAT being imposed on your company that would have been payable for the period in question. While there are still some uncertainties regarding the items subject to the tax, it's recommended to follow best practices to maintain tax compliance.
File VAT return
VAT returns must be filed monthly if your company has an annual turnover above AED 150 million. Businesses with revenue below that level must file quarterly. This can be done electronically through the FTA website. Failure to file a tax return within the specified timeframe will make the business liable for fines.
Understand zero rates and exempt suppliers
The FTA has exempted some businesses in priority sectors from tax. Being a zero-rated supplier means that the goods being supplied are still VAT taxable, but at the rate of zero per cent. Therefore, your company is still required to record and report on all supplies. Such industries include real estate developers, jewellery, airlines, schools, clinics and hospitals.
Reverse charges are the amount of VAT one would have paid on goods or services if they were purchased in the UAE. These charges apply when goods and services are imported from outside the GCC. As the business is not required to pay VAT at the point of import. the responsibility for reporting the VAT transaction shifts from seller to buyer (under the Reverse Charge Mechanism). In this case, the buyer reports their Input VAT (on the goods purchased) as well as their normal output VAT (on sales) in their return for that quarter.
Get the basics right
A tax invoice must be issued within 14 days of the date of supply. It is mandatory for a tax invoice to include the name, address and tax registration (TRN) of the registrant making the supply. An invoice must have a unique number and date of issue which enables identification of the tax invoice and the order of the invoice in any sequence. Also, it is mandatory for it to clearly state the unit price, the quantity or volume supplied, the rate of tax and the amount payable expressed in UAE dirham should be specified.
We know from experience in other mature VAT jurisdictions that businesses often struggle to address questions raised during audit by tax authorities. This is mostly due to the inability to produce complete documentation that substantiates liabilities and entitlements reported within the VAT return. Due to the transactional nature of VAT, it would be prudent for businesses implementing the tax to put in place a combination of automated processes and tools that can efficiently produce an audit file, upon the request of tax authorities.