VAT or Value Added Tax is a new tax system implemented in the UAE in 2018. As a business owner or consumer, understanding VAT obligations is important. This blog will explain the main aspects of VAT payments in simple, clear language.
What is VAT?
VAT stands for Value Added Tax. It is a consumption tax that is added to the price of goods and services. When you purchase an item or service with VAT included in the price, the seller collects the VAT amount and pays it to the government.
In the UAE, the standard VAT rate is 5% of the base price. This means for every 100 dirhams of goods or services sold, the seller must give 5 dirhams to the UAE government as VAT. Some items like fruits/vegetables have a 0% VAT rate.
Who Needs to Register for VAT?
Not all businesses in the UAE are required to register and charge VAT. The registration threshold is an annual turnover of AED 375,000 or more from taxable supplies.
- If your business earns less than AED 375k per year from sales, you do not need to register for VAT.
- Once you cross the threshold, you have 30 days to submit a VAT registration application online.
- Larger businesses with annual turnover above AED 150 million must register within 14 days.
To register, submit basic company details, tax info and license copies through the Federal Tax Authority (FTA) website. You will then receive a VAT registration number.
Calculating VAT Due
Registered businesses must calculate VAT amounts on sales and purchases each reporting period:
- Add up total sales, including VAT amounts charged to customers
- Calculate VAT amount included in those sales
- Add purchases, including VAT paid to suppliers
- Calculate VAT amount included in purchases
- The difference is the VAT payable – this amount goes to FTA
For example, if sales are AED 10,000 including AED 500 VAT, and purchases are AED 5,000 with AED 250 VAT, the VAT due would be AED 500 – AED 250 = AED 250.
Filling VAT Returns
All registered businesses must regularly file VAT returns and pay any VAT amounts due using the FTA online portal.
- Filing periods are quarterly (every 3 months) for most businesses
- Large businesses with over AED 150m turnover must file monthly
- Deadline is 30 days after period ends (e.g. Nov 30 for quarter ended Sept 30)
- Proper record keeping of invoices/receipts is important for returns
VAT Payment Methods
Payments can only be made electronically by bank transfer to a designated FTA account after submitting the return. Accepted methods include online banking or visiting a bank branch. It is crucial to pay on time to avoid penalties
Common VAT Situations
Here are some common scenarios businesses should understand:
Export Sales – No VAT charged but input VAT on purchases related to exports can be recovered.
Imported Goods – Self-assess and pay import VAT on goods value plus duty at port of entry.
Certain Supplies – For example, education, healthcare are ‘zero-rated’, meaning no VAT is charged.
Freezones – Special rules apply, check FTA guidelines for businesses operating in UAE freezones.
VAT Compliance
Following FTA guidelines and keeping good records greatly simplifies VAT compliance. Always consult the authority website if unclear on obligations. Proper record keeping of invoices and receipts issued/received is vital in case of an audit. Ignoring regulations can lead to financial penalties for non-compliance.
Conclusion
While the VAT system introduces new tax responsibilities, armed with basic knowledge of registration thresholds, returns, payments and common scenarios, businesses and individuals in the UAE can easily fulfill their VAT obligations. Do not hesitate to contact FTA for assistance to avoid mistakes or issues down the line. Proper documentation also safeguards against disputes
FAQS:
Late submission penalties of AED 500 per return or AED 5,000 for consolidated returns apply. Interest of 3% per month is charged on outstanding tax amounts as well.
Yes, certain essential supplies like basic food items, healthcare, education are exempt or ‘zero-rated’. Check FTA guidelines for full lists.
VAT should be charged separately from the base price on invoices. The total amount payable by customers must include the 5% VAT on top of the original price.
Contact the FTA taxpayer services center for guidance on registration, returns, payments and rules. They also offer an information helpline and website with resources to simplify VAT processes.
