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A value-added tax (VAT) is a consumption tax; it is an indirect tax paid by the end-user or consumer. It is collected by the value-adding party on behalf of the government and pays to the government the difference between the Vat Collected and Vat Paid.
VAT is levied on a product or service 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 has 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 sells 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 the 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.
Compliance with Vat laws and regulations is the only option across all tax jurisdictions, including; however, none of the jurisdictions 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 a true picture of taxes in a business.
There is no rocket science behind tax savings by optimizing the tax liabilities; however, one cannot ignore the role of the tax experts or tax consultants here. Vat Consultants in Dubai and other UAE emirates 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 the UAE; it is imperative to understand and analyze the impact it can make on the business in the 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.
Take an example of late or wrong Vat Registration; it can fetch the business a penalty of AED20,000. Apply 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 the average Vat Consultants monthly Fee; usually, it is AED1,500 or less per month for an average SME; yearly, it is AED18,000. Businesses still save AED2,000, at the same time, have a tax expert on its side at all times 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 that can impact profit negatively. Another angle of Vat's impact is on cash flows; non-recognition of the timely effects of input and output vat can lead to cash flow issues; you might end up tiding up huge cash in taxes.
As explained above, it is important to manage 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 in time.
It is highly recommended following key steps to take if not taken already:
- Change of mindset and decide.
- Implement an Accounting System in your business; 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.
Bens Chartered Accountants are a proud partner of businesses in the 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 an initial consultation to provide appropriate solutions and partnering.
Email: info@bensauditors.com
Cell: 00971 52 861 9076 | 00971 50 625 6414
Not really, Bens Chartered Accountants would like to work closely with you to make the changes exactly as per the revised law to make sure 100% compliance and adherence to local laws and required. Feel free to drop a note or give us a call.
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