Some of the challenges in the New UAE VAT regime


  • Overview

 

We are now into our sixth month of the VAT regime in the UAE. The journey of tax over the past few months has been grueling with most businesses across the UAE struggling with the implementation of the Value Added Tax (VAT) in their business. By the end of this month (June 2018) most businesses will have filed at least one VAT return; however, most businesses still claim to be struggling with the tax system.

The biggest challenge has been to correctly interpret the law and apply the requisite procedures to file a correct VAT return. Several new rules have been introduced over time and clarifications seem to be cropping up every day. With such an overdose of information in the market businesses are running from pillar to post trying to find the right thing to do. In such a scenario many companies have made errors in their first VAT return filing and are looking for proper support to become VAT ready.

Some of the major difficulties faced by businesses are provided below:

  1. Reverse charge mechanism
  2.  
  3. RCM has been one of the more complex aspects of the VAT regime in the UAE. Most accountants are unable to fully apply the correct principles of RCM to imports and businesses have faced losses due to noncompliance and not taking advantage of the Reverse charge mechanism. Let us understand RCM in detail:

Usually, the responsibility of the VAT liability is taken up by the supplier of goods/ services. However, there are a few cases in which case the liability to pay tax is applicable on the buyer of the goods/ services. This concept is referred to as UAE VAT Reverse Charge Mechanism (RCM).

According to Article 48 of UAE VAT Law, if a taxable person in the UAE imports taxable supplied for the purposes of his business then the taxable person shall be responsible for all applicable taxes.

There are, of course, additional obligations related to record keeping for tax calculated according to the RCM.

In principle, when any registered person imports, acquires or buys goods or services from outside the UAE, that person must pay any VAT that is due. Reverse charge is a special mechanism via which the VAT will be paid for by the buyer under the case when a supplier is not a resident in the country in which the supply takes place. When RCM is applied, the buyer of the supplies makes the declaration of both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return. In this way the two entries cancel each other from a cash payment perspective in the same return and there is no physical obligation to pay the VAT, hence not impacting the cash flow of the business. As a rule, imported goods are liable to VAT at the point of entry into the state. In most cases, a registered taxpayer can reclaim the VAT paid on the goods they have imported as input tax. The taxpayer will need the import VAT document to show that import VAT has been paid. Individuals and non-registered persons must also pay VAT on imported goods but will not be able to recover this as input tax.

 

 

  1. Input Tax Credit

Businesses have been highly confused as to which items input credit is claimable and for which items input credit is not. Few businesses have begun following a blanket rule of claiming input credit on all expenses connected with the business, without looking at the nature of the expense/ purchase or at the validity of the supporting documentation. For an input credit claim to be valid, a business must carefully review the documentation and understand the nature of the transaction. Lack of prudence could lead to possible fines and penalties in the case of a Tax audit by the FTA.

  1. Maintaining proper records

Most businesses seem to forget that the FTA has instructed all businesses to maintain records for a minimum of 5 years, and 15 years in case of Real Estate businesses. Point Of Sale (POS) invoices commonly erode after a period of 3-6 months and businesses need to be cautious with their documentation of such matters. It is imperative that accountants do a proper check of all invoices/ documentation and remember that the FTA has asked for proper maintenance of documentation connected to both claimable as well as non-claimable transactions.

 

There are several other issues being faced by businesses, both large and small, and the coming few months must be treaded cautiously for businesses to ensure that they are VAT compliant and ready to face challenges of the future.

 

We at AKW are able to help businesses become fully VAT ready and compliant. Our team comprises tax experts who have worked extensively across UK, Europe, GCC and Asia and have qualified ACCA and the GCC Tax Specialist examination conducted and approved by the FTA. We have multiple FTA examination qualified team members among several other qualified and proficient accountants.

We are confident of providing great value addition to your business through cost effective personalized solutions for you to comply with all VAT reclaim and accounting related requirements on time, while minimizing costs and errors, minimizing risk of penalties & fines, streamlining procedures and optimizing cash flow. Contact us at +971 56 349 1978 for resolution of your queries and for any further information.

 

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