VAT basics
Value Added Tax (or VAT) is an indirect tax. Occasionally you might also see it referred to as a type of general consumption tax. In a country which has a VAT, it is imposed on most supplies of goods and services that are bought and sold.
VAT is charged at each step of the ‘supply chain’. Ultimate consumers generally bear the VAT cost while businesses collect and account for the tax, in a way acting as a tax collector on behalf of the government.
A business pays the government the tax that it collects from the customers while it may also receive a refund from the government on tax that it has paid to its suppliers. The net result is that tax receipts to government reflect the ‘value add’ throughout the supply chain.
What is the standard rate of VAT in the UAE?
The standard rate of VAT in the UAE is 5%.
How does the government collect VAT?
Businesses are responsible for carefully documenting their business income and costs and associated VAT charges. Registered businesses and traders charge VAT to all of their customers at the prevailing rate and incur VAT on goods / services that they buy from suppliers. The difference between these sums is reclaimed or paid to the government.
Does VAT apply to all goods and services?
VAT, as a general consumption tax, is applied at 5% to all transactions of goods and services unless specifically exempt in Article 46 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax or subject to a rate of 0% as per Article 45 of the Federal Decree-Law.
What is a residential building for VAT purposes?
A residential building is a building or part thereof that is intended and designed for occupation by individuals, and mainly includes buildings which can be occupied by any person as main place of residence. It does not include:
Any place that is not a building fixed to the ground and can be moved without being damaged.
Any building that is used as a hotel, motel, bed and breakfast establishment, or hospital or the like.
A serviced apartment for which services in addition to the supply of accommodation are provided.
Any building constructed or converted without lawful authority.
Who can or will be able to register for VAT?
A business must register for VAT if its taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
Furthermore, a business may choose to register for VAT voluntarily if its supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500.
Similarly, a business may register voluntarily if its expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
What are the VAT-related responsibilities of businesses?
VAT-registered businesses generally:
must charge VAT on taxable goods or services they supply;
may reclaim any VAT they have paid on business-related goods or services;
keep a range of VAT related business records (e.g. Tax invoices);
report their taxable supplies and purchases in periodic VAT return.
What does a business need to do to prepare for VAT?
Businesses will need to meet certain requirements to fulfil their tax obligations. To fully comply with VAT, businesses will need to consider the VAT impact on their core operations, financial management and book-keeping, technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential that businesses try to understand the implications of VAT and make every effort to align their business model to government reporting and compliance requirements.
When are businesses supposed to start registering for VAT?
A Person required to register for VAT needs to submit a registration application to the FTA within 30 days of being required to register.
When are registered businesses required to file VAT returns?
Taxable Persons must file VAT returns with the FTA on a regular basis, within 28 days of the end of the Tax Period.
The Tax returns shall be filed online using e-Services.
How long must a taxable person retain VAT invoices for?
Any taxable person must retain VAT invoices issued and received for a minimum of 5 years.
How should a business determine the place of supply?
The place of supply will determine whether a supply is made within the UAE (in which case the UAE VAT legislation will apply), or outside the UAE for VAT purposes.
For a supply of goods, the place of supply should be the location of goods when the supply takes place with special rules for certain categories of supplies (e.g. water and energy, cross border supplies).
For the supply of services, the place of supply should generally be where the supplier is established with special rules for certain categories of supplies (e.g. for the supply of catering services, the place of supply shall be where the services are actually performed).
Can businesses offset customs duty against VAT payments?
No. VAT is payable in addition to applicable customs duties. VAT is computed on the value that includes the customs duties
What sectors will be zero rated?
VAT will be charged at 0% in respect of the following main categories of supplies:
Exports of goods and services to outside the GCC;
International transportation, and related supplies;
Supplies of certain sea, air and land means of transport (such as aircraft and ships);
Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
Supply of certain education services, and supply of relevant goods and services;
Supply of certain healthcare services, and supply of relevant goods and services.
What are the categories of exempt supplies?
The following categories of supplies will be exempt from VAT:
The supply of some financial services;
Residential properties (excluding the first supply of newly constructed residential property which qualifies for the zero-rating treatment);
Bare land; and
Local passenger transport.
Businesses that satisfy certain requirements covered under the Legislation (such as being resident in the UAE and being related/associated parties) will be able to register as a VAT group. VAT grouping would generally simplify accounting for VAT.
Will there be bad debt relief?
VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to bad debt which has been written off by the VAT registered business. The legislation includes the conditions and limitations concerning the use of this relief.
Will there be a profit margin scheme?
To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the sale price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin.
How will partial exemption work?
Where a VAT registered person incurs input tax on its business expenses, this input tax can be recovered in full if it relates to a taxable supply made, or intended to be made, by the registered person. In contrast, where the expense relates to a non-taxable supply (e.g. exempt supplies), the registered person may not recover the input tax paid.
In certain situations, an expense may relate to both taxable and non-taxable supplies made by the registered person (such as activities of the banking sector). In these circumstances, the registered person would need to apportion input tax between the taxable and non-taxable supplies.
Businesses will be expected to use input tax (ratio of recoverable input tax to total input tax incurred) as a basis for apportionment in the first instance although there will be the facility to use other methods where they are fair and agreed with the Federal Tax Authority.
Will there be any special schemes for SMEs?
No special rules are planned for small or medium sized enterprises. However, the FTA is providing through its website material and resources for these entities to assist them with their enquiries.
How will insurance be treated?
Generally, insurance (vehicle, medical, etc) is taxable. Life insurance, however, is an exempt service.
How will financial services be treated?
Fee based financial services are subject to VAT while margin based products are exempt.
How will Islamic finance be treated?
Islamic finance products are consistent with the principles of sharia and therefore often operate differently from financial products that are common internationally.
To ensure that there are no inconsistencies between the VAT treatment of standard financial services and Islamic finance products, the treatment of Islamic finance products is aligned with the treatment of similar standard financial services.
Can UAE nationals claim VAT incurred on building new residences?
A scheme has been introduced to allow UAE nationals to reclaim VAT paid on goods and services relating to constructing new residences which will be privately used by the person and his family. This will allow the recovery of VAT incurred on such expenses including contractor’s services and building material.
Will it be possible to issue cash receipts instead of VAT invoices?
A registered taxable person must issue a valid VAT invoice for its taxable supplies. To be considered as a valid VAT invoice, the document must include certain particulars as mentioned in the legislation. In certain situations the supplier may be able to issue a simplified VAT invoice. The conditions for the VAT invoice and the simplified VAT invoice are mentioned in the legislation.
Under which conditions will businesses be allowed to claim VAT incurred on expenses?
VAT on expenses that were incurred by a business can be deducted in the following circumstances:
The business must be a taxable person.
VAT should have been charged correctly (i.e. unduly charged VAT is not recoverable).
The business must hold documentation showing the VAT paid (e.g. valid tax invoice).
The goods or services acquired are used or intended to be used for making taxable supplies.
VAT input tax refund can be claimed only on the amount paid or intended to be paid before the expiration of 6 months after the agreed date for the payment of the supply.
Will non-residents be required to register for VAT?
Non-residents that make taxable supplies in the UAE will be required to register for VAT unless there is any other UAE resident person who is responsible for accounting for VAT on these supplies.
VAT is due on the goods and services purchased from abroad.
In case the recipient in the State is a registered person with the Federal Tax Authority for VAT purposes, VAT would be due on that import using a reverse charge mechanism.
In case the recipient in the State is a non-registered person for VAT purposes, VAT would need to be paid before the goods are released to the person.
How will Government Entities be treated for VAT purposes?
Supplies made by government entities will typically be subject to VAT. This will ensure that government entities are not unfairly advantaged as compared to private businesses.
Certain supplies made by government entities will, however, be excluded from the scope of VAT if they are not in competition with the private sector or where the entity is the sole provider of such supplies. It is likely that certain government entities will be entitled to VAT refunds.
For the supplies provided for government entities, the treatment of such supplies shall depend on the same supply and not on the recipient of the supply. Therefore, if the supply is subject to the standard rate, the treatment would remain the same even if it is provided to a government entity.
Will businesses have to report their business activities in respect of each Emirate?
Businesses will need to complete additional information on their VAT returns to report revenues earned in each Emirate.
Will the goods exempt from customs duties also be exempt from VAT?
No. Imported goods may be exempt from customs duties but still be subject to VAT.
FAQ on VAT and Real Estate Business
