Are you considering setting up a business in Dubai, Abu Dhabi, or Ajman? Wherever you setup your business in the UAE, there are huge business opportunities awaiting you!
But you should know by now that every business setup in the UAE after January 2018 may have to register for Value Added Tax (VAT) – including your business!
Tax regulations are notorious for being complicated and full of rules, conditions and exceptions. The last thing you want to do as you start your UAE VAT small business is to be distracted by tax compliance issues. Worse, you don’t want to be penalized for violating the tax law!
So what should you do?
We are going to help you take the guesswork out of the Value Added Tax (VAT.) This article explains to entrepreneurs, small business owners and managers the essential facts of VAT in plain English.
We also give you a step-by-step plan on how to handle your VAT compliance. We cover such important topics as new business VAT registration and VAT registration threshold, among others.
Let’s dive in.
Table of Content
- Chapter 1: Why Should You Consider VAT Registration Now?
- Chapter 2: What is Value Added Tax (VAT)? New Business VAT Explained
- Chapter 3: When and Who Should Register for VAT in UAE.
- Chapter 4: How to Register VAT in UAE?
- Chapter 5: What Should You Do Next?
- Chapter 6: Filing Your VAT Returns in 4 Easy Steps
- Final Thoughts
Chapter 1: Why Should You Consider VAT Registration Now?
You might be wondering, “Why should I bother with Value Added Tax (VAT) registration now?” After all, I’m just starting my small business.
Well, there are actually a number of reasons why a new company should consider VAT registration.
First, you may have already met the registration requirements(check the requirement rules below). If not, then you may have to register soon which could cause you to scramble to avoid penalties
Second, there are penalties involved.The last thing you want as a person starting a new business is to be penalized for non-compliance. It is costly, distracting and depressing for your staff.
I’m not just talking about being penalized for late registration, but also for violating all kinds of other rules (there are many). Taking the time now to familiarize your staff with VAT allows you to avoid unwanted surprises later.
Third, failure to consider VAT registration could affect your commercial reputation.At this point, you are likely hopeful of getting contracts and selling to all kinds of big and famous companies, right?
Those companies will ask you for your company’s VAT registration number and certificate. It will hurt your image if you tell them you don’t have one yet.
You may not be qualified to register now if you don’t meet the VAT registration threshold. However, voluntary VAT registration is available, and you may want to jump on board and register as soon as you qualify.
Chapter 2: What is Value Added Tax (VAT)? New Business VAT Explained
To better explain what Value Added Tax (VAT) actually is, let’s take a look at how it works. There are three basic steps:
Step 1: Collect VAT
When you sell products and services, add the applicable tax rate to your invoice and collect the tax from your customers. This tax is called the output tax.
Step 2: Pay VAT
When you buy products and services from suppliers or service providers, expect them to charge you VAT. It will be mentioned on their invoices.
Keep a record of that tax. It is called input tax.
Step 3: Make Scheduled VAT Payments
Every month or quarter (as determined by the FTA) you will be required to file and pay your taxes.
How much should you pay? You will have to pay your total tax due, which is determined by this simple formula:
Due tax = Output tax – input tax
If you collect less than you pay, then you will receive a tax credit.
A few things to keep in mind:
First, your input tax should be calculated for purchases you make for business reasons and for purchases related to providing your customers with taxable goods and services.
You cannot claim the VAT you pay on the company annual party as input tax.
Second, as you see from the mentioned steps, VAT is borne by the final consumer of the product and services you sell. As a business, you don’t bear the tax expenses. You merely act as a collector of taxes on behalf of the tax authorities.
Having said that, you will incur “compliance” expenses. You will have to account for the collection, payment, processing and filing of taxes. They add up and your company will have to pay for them.
Third, it is important to know that VAT is NOT a tax on profits or income. Companies don’t have to pay taxes on their profits, and employees don’t have to pay taxes on their wages.
But wait! How much should you charge?
There are three tax categories. Each rate applies to a group of products and services:
- VAT Exempt products and services: As the name suggests, VAT exempt products and services are exempt for VAT. You don’t charge VAT, and you don’t calculate it on your invoice.
- Zero rated products and services:Products and services designated as zero rated, will be charged VAT, but at 0%. On your VAT invoice, you will need to show the VAT for such products and services as zero.
- Standard rated products and services:Whatever is not exempt or zero rated is charged at the standard VAT rate, which is currently set at 5%.
The following diagram shows what products fall under the exempt and zero rated categories.
For more information, check this reference (needs link added) from the Federal Tax Authority (FTA.)
Supplies, Supplies, Supplies, What are Supplies?
I don’t want to bother you with taxation jargon, but you will hear this term – “supplies” – repeated in VAT literature, and for the uninitiated it may be confusing.
Here’s the deal:
Many business people think of supplies as general purpose consumables, such as stationary.
In the context of VAT, the term “supplies” refers to goods and services. This could by the goods and services your company sells and it could also mean the goods and services your company purchases. They are all supplies.
Whenever you hear or read the word “supplies” in VAT literature, just replace it with “goods and services.”
Chapter 3: When and Who Should Register for VAT in UAE.
The simple answer is when you meet the requirements.
Let me explain:
Let’s say that you have met some of the VAT registration requirements by being a business setup in the UAE for the purpose of providing supplies (products and services).
But there is a major requirement that determines your Value Added Tax (VAT) registration eligibility: your registration turnover during the past 12 months.
So, if your registration turnover is:
- Over 375,000 dirhams over the past 12 months, then you will have to register (mandatory registration)
- Between 187,500 and 375,000, then you may register (voluntary registration)
- Less than 187,500, then you are not eligible for registration
You will notice we wrote “registration turnover” What does it mean?
Registration turnover (VAT turnover in the UAE) is your sales from the following:
- Standard rated supplies your company provided
- Zero-rated supplies your company provided
- Imported services
- Imported goods
For example, if you are running a government approved nursery, then some of your supplies (e.g. nursery fees) are zero rated. Other supplies (e.g. meals) are standard rated. Both supplies (the zero rated and the standard rated) should be counted in your taxable supplies.
A few important points to mention here:
First, you can apply for voluntary VAT registration if your taxable or sales purchases are more than 187,500. Why would you want to register voluntarily? That is a discussion for another blog. Please let me know in the comments below if you are interested in knowing more about this topic.
Second, some UAE free zones are called “designated zones” and they are treated as being outside the country. However, they may have to register for VAT. Read our blog on VAT for Designated Zones to learn more.
Third, if you individually, or with other partners, own more than one business in the UAE, then you may have to register as a VAT group (group registration). This is a more advanced topic. We will cover it in chapter 7.
So, when exactly do you have to register for VAT?
You will have to register for VAT within 30 days of reaching the threshold.
Here is some simple advice: at the end of each month, calculate your registration turnover. If you have reached the threshold, then rush and register.
Now here is some even better advice: if you are close to reaching the threshold and think that you are going to hit it in the following month or so, go ahead and register.
But, do you want to know the best advice of all?
The best advice is to register as soon as your reach the voluntary VAT registration threshold. This will allow your company to comfortably register and comply with VAT rules, without having to “rush” and register at the last minute.
One more important thing:
If you are late to register, you could be penalized 20,000 dirhams – and the VAT is calculated from the first day of the month following the month in which the threshold is reached, not from the date you register.
Chapter 4: How to Register VAT in UAE?
How do I register my new company for vat? First things first, you will need to register with the Federal Tax Authority (FTA.) The FTA is the government agency you will interface with when you register, file your taxes and for any other tax related issues.
Once you have met all the registration requirements (see the previous chapter) you are ready to register for VAT.
VAT registration and filing procedures are online. Even the tax payment is electronic – which is quite convenient!
The VAT Registration Online process is about your company applying for a tax record, and receiving a Tax Registration Number (TRN) and a tax registration certificate.
With your TRN, you will be able to charge VAT. Before receiving your TRN, you cannot charge and collect VAT. It is against the law.
We identified four simple steps you need to take to register your company with the FTA. Here they are:
Step 1: Get Ready
Before you can register for VAT, you should have some documents and some information handy. Here is an non-exhaustive checklist of documents and information you may need. The actual list is determined by the legal status and business activities of your company.
- Company trade license
- Articles of Association
- Certificate of incorporation
- Bank account information
- Documents identifying the authorized signatory (e.g. passport copy, Emirates ID, etc.)
- Description of business activities
- Last 12 months of turnover figures
- Projected future turnover figures
- Expected values of imports and exports
- Whether you expect to deal with GCC suppliers or customers Details of Customs Authority registration, if applicable
- Any other official documents authorizing the entity to conduct activities within the UAE
Keep in mind that you only need soft copies of the required documents. You will be asked to upload them during the registration process.
Step 2: Create a Login Account
- Visit the FTA website and click on Create User Account
- Fill out the form and check your email for a verification email
- After you confirm, you will be granted access to your account
Step 3: Register Your Company
Login and navigate to the VAT registration form. The registration process is made up of a series of navigable pages. You can move back and forth between them. You can save your application at any time as a “draft” and resume the registration process later.
Step 4: Submit Your Registration and Receive Your TRN
Once you have entered all the required information on your application form, and are happy with the quality of information you submitted, submit your application.
The FTA will review your application, and if everything is OK, you will receive a confirmation by email, along with your TRN. You will also be issued a tax registration certificate, which you can download from the portal.
Chapter 5: What Should You Do Next?
Once you have registered for VAT, you will have to comply with VAT rules, regulations and procedures.
Here are the major procedures you will have to comply with:
Update Your Invoices
With the issuance of your TRN, you will have to charge and collect VAT on your supplies (sale of products and services.) But, you cannot just issue plain invoices anymore. They will have to be “VAT Invoices” and to become a tax invoice, your invoices will have show certain details.
Keep in mind that if you are selling to non-registered people (i.e. if you are a retailer) your displayed prices should be tax inclusive. In addition, the invoice should show the tax portion of the total invoice amount.
If you are selling to registered companies (i.e. business to business transactions), or if the sale transaction is an export, your prices can be tax exclusive.
As part of good record keeping, maintain the TRN of your VAT registered customers. You will need this information as part of your VAT compliance.
Also, make sure that your accounting records keep a tally of all the VAT you collect. You will need it when the time comes to file and pay your taxes.
Coordinate With Your Suppliers
Expect your suppliers to request your TRN and registration certificate for their records. They will need this documentation as part of their compliance requirements.
Make sure that your accounting records keep a tally of all the VAT you pay on your business purchases (i.e. purchases related to your taxable supplies.) You will need it when the time comes to file and pay your VAT returns.
You are required to keep your tax related records for five (5) years, or 15 years if you are a real estate company.
There is a long list of documents the FTA requires you to maintain. But basically you will have to keep records of all your invoices, bills, credit notes and import/export documents.
Moreover, you are also required to keep your major accounting records, such as your balance sheet, profit and loss statements, payroll, etc.
Check this FTA document (needs link inserted) for the full list of required documents.
Chapter 6: Filing Your VAT Returns in 4 Easy Steps
Every registered company is assigned a VAT filing calendar. The filing happens every quarter, and for some companies every month.
To determine your filing calendar, login to your FTA account. Make a note of those dates. You will have to calculate your due tax (or tax credit) for the three-month period up until your filing date.
Then, you will have to file your taxes before the end of the 28th day following the end of the tax period.
So, how do you file your taxes?
Step 1: Login to the FTA Portal
You will login with the username and password you created during the registration process. Upon logging in, navigate to the VAT Returns page under the VAT section.
Step 2: Complete the form
The filing page will present you with a set of fields to enter your VAT information such as your input tax, output tax, imports, etc. The fields will ask you for the sum of those values (input tax, output tax, etc.) and as of this writing, you are not required to upload any supporting documents.
Step 3: Submit the Form
When you are sure the entered information is correct, submit your filing.
Step 4: Pay Your Due Tax
The FTA will send you a confirmation and request that you pay your taxes. Navigate to the payment page to pay your taxes. There are multiple payment options:
- eDirahm or Credit card
- eDebit: a direct debit from your company bank account
- Bank Transfer: a local or international bank transfer.
Knowledge is power, and knowledge gives you peace of mind. You will eventually require the help of a professional accountant or a tax agent to help comply with VAT rules. But having an overall understanding of the registration and compliance process – including how to pay VAT in the UAE and how to accomplish VAT registration– will allow you to manage your legal requirements.
If you have any questions about registering your company for taxes, or complying with VAT regulations, then go ahead and leave us a comment below. We will try our best to answer your question now or cover the topic in a future blog post.