VAT in the UAE: Answers to Your Frequently Asked Questions
VAT, or value-added tax is an indirect tax that consumers pay when they buy goods or services. Businesses collect it on behalf of the government and add it to the final price.
Unlike income tax, VAT is uniform for all consumers, regardless of their income level. More than 170 countries around the world implement VAT or its equivalent, like Goods and Services Tax (GST). This includes all European Union nations, Canada, Australia, New Zealand, Singapore, and Malaysia. The tax is applied at every stage of the supply chain and can reach rates as high as 27%.
VAT was implemented across the UAE in January 2018. The goal was to give the federal government a stable source of revenue for maintaining high-quality public services.
Read ahead, as we answer a few frequently asked questions about VAT below.
How Much Is VAT in the UAE?
The UAE enforces four different VAT rates on taxable supplies.
Standard-Rated Supplies of VAT
In the UAE, standard-rated supplies are subject to a 5% VAT at the point of sale. This rate applies to all goods and services traded on the mainland, except for those that are zero-rated or exempt. For VAT purposes, any part of the UAE that is not a designated zone is considered mainland.
Common scenarios for standard-rated VAT are listed below:
- Transactions where both the supplier and recipient are located within the UAE mainland, and the goods or services are delivered there
- The movement of goods from the mainland to a UAE-designated zone
- All services provided within the UAE, including transfers between designated zones
Zero-Rated Supplies of VAT
Zero-rated supplies are subject to a 0% VAT rate. Even though these supplies are taxed, the rate applied remains zero. This applies to certain goods and services regardless of whether they are listed under zero-rated categories.
Most exports in the UAE are considered zero-rated, which means a 0% VAT is charged on them. However, to qualify, specific conditions outlined in the UAE's executive regulations must be met. The following are examples of zero-rated supplies:
- Exports of goods and services to non-GCC countries
- Exported telecommunications services
- International transportation of passengers and goods, along with related services
- Import and supply of investment-grade precious metals like gold, silver, and platinum with a purity of 99% or more
- Supply of crude oil and natural gas
- Certain educational and healthcare services
- Buildings intended for charitable use
Exempt Supplies of VAT
Exempt supplies are not subject to VAT, and businesses cannot reclaim input tax on these supplies, except under specific conditions mentioned in the UAE VAT law. Exempt supplies are transactions where no VAT (neither 0% nor 5%) is charged.
Here are a few examples of exempt supplies in the UAE:
- Sales or leases of residential buildings, except those that are zero-rated
- Local passenger transport services
- Supply of undeveloped, or "bare," land
Out-of-Scope Supplies
Out-of-scope supplies fall outside the purview of the UAE VAT system. These transactions do not need to be accounted for in VAT returns, and businesses involved only in out-of-scope supplies are not required to register for VAT. But businesses with taxable supplies exceeding AED 187,500 can still register voluntarily.
There are two types of out-of-scope supplies:
- Goods imported from a foreign supplier and sold to a foreign buyer without entering the UAE, referred to as merchant trading
- Supplies made by a UAE VAT-registered person to another VAT-registered entity in a GCC state
How Do I Calculate VAT in the UAE?
Total Price with VAT
To find the total price including the 5% VAT, simply multiply the original price by 1.05.
Total Price without VAT
If you want to calculate the price before VAT was added, divide the total price by 1.05.
How Do I Register for VAT in the UAE?
Under UAE VAT law, businesses are required to register for VAT if their annual taxable supplies and imports exceed AED 375,000. They also have the option to register voluntarily if their total supplies, imports, or expenditures exceed AED 187,500. You can register for VAT on the Federal Tax Authority’s (FTA) website.
When Should I File VAT Returns in the UAE?
Businesses registered for VAT in the UAE are obligated to submit their VAT returns and pay their VAT liabilities quarterly to the FTA. They need to ensure that both the filing of the VAT return and payment are made by the 28th day following the end of each quarter. However, the FTA has the authority to assign different tax periods for certain taxable persons.
What If I Fail to File My VAT Return By the Due Date?
If your business does not file a VAT return by the FTA’s specified deadline, you may face an initial penalty of AED 1,000. If the non-compliance continues within a 24-month window, the penalty increases to AED 2,000. The FTA is authorized to pursue legal action for non-filing as well.
If you pay the VAT amount indicated in your return but pay it well past the deadline, you may incur a late payment penalty. This could be an immediate 2% fine on the unpaid tax, an additional 4% on the seventh day after the deadline, or a 1% daily penalty on any unpaid amount within a month.
Late VAT filings can have other repercussions, too. For instance, a late return can slow down your VAT refund process. Repeated late filings may also trigger an FTA audit, a process that is both tedious and stressful for everyone involved.
What Are the Other Penalties for VAT Offences in the UAE?
FTA has the authority to impose penalties and fines on taxpayers who violate VAT laws or regulations. According to Federal Law No. (7) of 2017 on Tax Procedures, various penalties are outlined for infractions related to UAE VAT law and tax evasion.
For example, failing to display a price list at a business location incurs a penalty of AED 15,000. If a business does not issue a tax invoice, credit note, or any equivalent document during a supply, it faces a fine of AED 5,000 for each document. Moreover, not notifying the FTA about a tax charge based on margins results in a penalty of AED 2,500. If goods are not stored in a Designated Zone or are moved to another such zone, penalties range from AED 500 to 300% of the tax involved. Lastly, tax evasion can result in a penalty of 300% of the evaded tax amount.
What Is Input Tax Recovery Under VAT in the UAE?
Input tax is defined as the VAT that is either paid or applicable on the purchase of goods or services and during imports. Input tax recovery refers to the process through which VAT-registered businesses in the UAE can reclaim the VAT incurred on approved business-related purchases and expenditures.
All businesses, regardless of their registration status, must save their invoices and documents, including:
- Balance sheets
- Profit and loss statements
- Fixed asset records
- Payroll information
- Inventory logs
- Comprehensive accounting records with full details on sales, purchases, payments, receipts, revenues, and expenses
VAT-registered businesses in the UAE are particularly required to keep these records for five years from the date of each transaction.
What Are a Few Best Practices for Successful Input Tax Recovery?
- To recover input VAT in the UAE, you need to ensure that the goods and services you purchase are used for making taxable sales, as defined by UAE VAT Law.
- Always ask for a tax invoice when making purchases that you plan to claim input tax on, because this serves as your official proof of the transaction and has essential VAT details.
- The tax invoice must include all relevant information about the supply for which you seek recovery.
- You should either pay or plan to pay the full amount due for these supplies, ideally within six months of the agreed payment date to confirm it as a legitimate business expense.
Note:
- Certain supplies, such as public transport, bare land, and financial services, are exempt from VAT in the UAE, meaning input VAT cannot be recovered on these items.
- Recreational expenses related to client or employee entertainment are also not considered business expenses and won't qualify for input VAT recovery, although expenses for business meetings may be an exception.
- Input VAT can only be claimed on commercial vehicles like delivery vans that are strictly used for business purposes.
- VAT on personal cars used by employees or owners is not eligible for credit.
- Free goods or services given to employees for personal use, such as gym memberships, generally, do not qualify for input VAT recovery.
How Do You Calculate Input Tax?
If you’re managing your accounts manually, you'll need to carefully review each invoice to identify the VAT amount. After that, you'll have to add these amounts together to determine the total input tax you can claim for that tax period, which can be quite time-consuming.
At Oblique Consult, our accountants can help streamline this process for you. We use efficient systems and expert knowledge to calculate VAT accurately. Our team also scrupulously reviews invoices and tallies amounts, so that there are no mistakes and you capture all eligible input tax without the burden. With our support, you can file your VAT returns confidently and stay compliant with all regulations.
Book a free consultation today!
