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The value added tax was first introduced to the UAE on 1 January 2018 and currently sits at 5%. It is applied to most goods and services, although some are subject to either a 0% rate or have a VAT exemption.

Here is what you need to know about VAT, including issues with collecting it.

What is VAT?

VAT is an indirect tax, which means a business collects that tax on behalf of the government. It is added to the price or fee of the goods and services the business sells to its customers and then forwarded to the government by the business.

Who pays VAT?

Although it seems like a business tax, VAT is not a business liability–your business isn’t paying VAT out of its own profits. Rather, your customers and clients pay the VAT to your business, and you then send the amount collected to the Federal Tax Authority (FTA) at the end of the specified period.

Although businesses forward VAT to the FTA, they do so after deducting the input VAT they have paid to suppliers on their expenses and purchases.

You must register for VAT if your annual taxable supplies and imports are above the minimum amount of AED 375,000. You can register voluntarily for VAT if you have taxable supplies and imports of between AED 187,500 and AED 375,000, or if your expenses exceed the voluntary registration amount.
Even if you feel your business does not meet the requirements, you must keep financial records so the FTA can verify your VAT exemption.

Is it possible to reduce my VAT payable?

You cannot reduce the amount you collect from your customers or clients (this is known as the output VAT), but you can reduce the amount you forward to the government based on how much you have paid to your suppliers (this is known as the input VAT).

If you are VAT registered you:

– Must charge VAT on taxable goods or services
– May reclaim any VAT you’ve paid on business-related goods or services
– Must keep business records to verify you are paying the amount you owe

Common issues with businesses collecting VAT

Some business owners find themselves without enough money to cover the VAT they are required to send to the FTA. This can happen for a number of reasons.

1. Customers have not paid the required VAT
Customers are not allowed to claim VAT if they don’t intend to pay within 6 months, in which case your business should ensure the customer’s intent to pay within 6 months and should report VAT accordingly.

2. Robust accounting including receivables system is not in place, resulting in a delay in payments by customers
That delay affects your ability to pay the VAT owed to the government. Once an invoice is issued VAT charged becomes payable regardless of when the invoice is paid by your customer.

3. Cash collected as VAT is mixed with business receipts and has been used
It’s best to have a separate bank account for your VAT so the money isn’t accidentally spent on business or personal expenses.

How can I prevent issues with VAT payable?

There are penalties for failing to pay the VAT accurately and on time. Those penalties can add up to a lot of money, so it’s important you properly collect and report the VAT.

Issues with VAT collection and forwarding happen when you do not have proper accounting procedures in place and do not recognize the VAT payable properly.

Some ways to avoid this include:

– Keeping vat collected in separate account and using that account to pay VAT
– Paying VAT monthly to FTA so you’re never behind on it

If you have any questions at all about VAT or managing your VAT payable, please contact us. We’re a trusted cloud accountant in Dubai and we’re here to help you.

*Note: this blog post is intended as information only and is not meant to substitute specific accounting, tax, or financial advice.