Reduce VAT Liability, Increase Profits

April 5, 2021

What is Vat?

A value-added tax (VAT) is a consumption tax, it is an indirect tax paid by end user or consumer. It is collected by the value adding party on behalf of the government and pay to government the difference of the Vat Collected and Vat Paid.

How it works

VAT is levied on a product or services whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.

For example:

Manufacturer/Trader/Business acquire a raw material, process it, and sell it.

Acquired Material at $100, Vat of 5% is applied, total amounting to $105. The business processes the material and sell the finished product at $200, with 5% vat, selling price which consumer will pay will $210.

The business will pay to government VAT amount as follows:

-         Vat Collected: $10

-         Vat Paid: $5

-         Net paid to govt. $5.

It looks that simple mathematically, however different tax treatment of various components of the business transactions makes it a complex subject. Vat in UAE is further complex considering the domestic and regional business environment and dynamics.

Unlike other jurisdictions (countries), UAE Vat has special dynamics, considering Gulf Cooperation Council (GCC) and Free Zones. It resembles somehow with European Vat System in terms of GCC Tax Framework, however it is incredibly unique with respect to tax in free zone versus rest of the world.

For example, in UAE there are various Free Zones, some of the free zones are declared as Designated Zones under Vat Law, such designated zones have special Vat treatment of business transactions versus mainland businesses. A mainland company is any business registered in UAE other than in a Free Zone or Offshore.

What is Vat Optimization

Compliance with Vat laws and regulations is the only option across all tax jurisdictions including, however none of the jurisdiction prevents from optimizing the Tax Liabilities. In other words, reduce your payable tax amount within the legitimate provisions of the tax laws. Tax optimization is not Tax Evasion, rather it represents true picture of taxes in a business.

How to save on Vat Tax Liability

There is no rocket science behind tax savings by optimizing the tax liabilities, however one cannot ignore role of the tax experts or tax consultants here. Vat Consultants in Dubai and in other emirates in UAE are working with businesses since 2018, the year of Vat Implementation in UAE.

Businessmen usually consider the overheads of hiring an inhouse or outsourced tax consultants in UAE, it is imperative to understand and analyze the impact it can make on the business in short and long-term i.e., hiring or not hiring an expert.

Working with various businesses in UAE, it is observed that one wrong move whether it is simply a Vat Registration in UAE or Vat Return Submission in UAE can lead to penalties ranging from AED3,000 to AED20,000 or more.

Here is an example, of late or wrong Vat Registration, it can fetch the business a penalty of AED20,000. Apply a simple math here, spread the penalty amount over a year, it will be monthly AED1,667. Compare the calculated penalty amount of AED 1,667 with average Vat Consultants monthly Fee, usually it is AED1,500 or less per month for an average SME, yearly it is AED18,000. Business still save AED2,000, at the same time have a tax expert on its side at all time who will not only do the right things or things right as required by vat law but also optimize the tax liabilities.

Take another example, many businesses are not registering with FTA (Federal Tax Authority in UAE) on time when they cross voluntary thresholds of Taxable sales or Taxable Expenses of AED 187500 to claim the taxes paid, or if they get registration, they are not claiming comprehensively the Vat Tax paid on their daily expenses and purchases, which leads to paying higher amounts to government and absorbing the unclaimed Tax amounts as cost of the business.

Accounting firms in Dubai or in house Accounting and Vat Experts can help companies to optimize their tax liability by careful analysis of business transactions, taking into account components of Input Vat and timely recognition of taxes to manage business cash flows and much more. Vat is not a business expense; however it can be a business expense which can impact profit negatively. Another angle of Vat impact is on cash flows, non-recognition of timely impacts of input and output vat can lead to cash flow issues, you might end up tiding up huge cash in taxes.

Why it is important

As explained above, it is important to mange business taxes for many reasons:

- Compliance with local laws and regulations.

- Reduce or mitigate business exposure.

- Manage business cash flows.

- File accurate and timely tax returns.

- Readiness for Vat Audit by FTA at any point of time.

What to do

It is highly recommended following key steps to take if not taken already:

·        Change of mind set and decide.

·        Implement an Accounting System in your business,

      there are many in the market, cloud based, easy to

      use, lean on cost and complexity.

·        Hire an in house or outsourced Accounting and Vat

      Expert.

·        Conduct a Vat Review of past vat submissions, if new

      to the Vat, take a solid and accurate start.

Contact us

Bens Chartered Accountants are proud partner of businesses in UAE and GCC region across various industries, helping businesses to optimize their tax liability and reduce business compliance exposure. Our expert accountants and tax consultants are available for initial consultation to provide an appropriate solutions and partnering.

Email: info@bensauditors.com