Our in-house VAT expert tells you about input and output VAT, how to claim returns, and what support is available to small firms
VAT or value added tax came into effect in the UAE from January 1, 2018, onwards. Levied by the Federal Tax Authority (FTA), this tax is a crucial aspect of business compliance in the country. It affects most goods and services, which means registered firms in the country are responsible for accounting for VAT accurately.
If you’re a small business owner, the guidelines on VAT might seem complicated at first. In this article, we speak to Neetu Jain, chartered accountant and tax advisor at A&A Associate, who shares her insight into the VAT accounting process, from registration requirements to filing VAT returns in the UAE.
What is VAT in UAE?
In simple terms, VAT is a tax on the consumption or use of goods and services. In the UAE, a standard rate of 5 percent is levied at the point of sale, so the end consumer bears the VAT cost. Businesses collect the VAT on behalf of the FTA and can also reclaim VAT paid on their purchases related to business activities.
VAT Eligibility: When should my business register for VAT?
First, determine whether your business needs to register for VAT. Registration depends on your taxable turnover, which includes the value of all goods and services your business supplies as well as imports.
Mandatory registration:
- If your UAE-based business’ taxable supplies and imports exceed AED 375,000 over the past 12 months or are projected to exceed this amount in the next 30 days, then VAT registration is mandatory.
- Non-UAE-based businesses must register if they make taxable supplies in the UAE, regardless of value, and there’s no other party liable to pay the VAT.
Voluntary registration:
- For businesses with supplies and imports exceeding AED 187,500 but below AED 375,000 over the past 12 months or anticipated in the next 30 days, VAT registration is optional.
Enterprises of a smaller scale will likely have a lower turnover, so voluntary registration might apply to most small business owners. This means that if you sell products worth AED 200,000 annually, you have the option to register for VAT, though this is not mandatory for you.
If your business does fall in the optional range, should you choose to account for VAT? According to our expert VAT consultant Jain, it is advisable for small businesses in the UAE to register for VAT when the option becomes available to them.
“Registering for VAT will make small businesses seem more credible and trustworthy to other registered enterprises; hence, making working with other businesses seamless. This is because you will be filing returns with the FTA and be seen as a legitimate organization. Plus, if you register for VAT, you can get back claims as well, given that your input VAT outweighs the output VAT, which will in turn be beneficial for your business,” explained Jain, who has over five years of experience in the industry.
How to account for VAT on sales (output VAT)
Your output VAT is the tax charged on the sale of goods or services. This is the indirect charge that is paid by your customers (or businesses) when they purchase from you.
For bookkeeping purposes, have a look at the following example:
A stationery shop sells office supplies to a customer worth AED 1,000. In the UAE, the VAT on this sale would be AED 1,000 x 5 percent = AED 50. So, the total amount charged to the customer will be AED 1,050.
- Debit: Cash/Bank (AED 1,050)
- Credit: Sales Revenue (AED 1,000)
- Credit: Output VAT Payable (AED 50)
How to account for VAT on purchases (input VAT)
Input VAT is levied on eligible business expenses. This is the charge that the business pays when purchasing supplies for its operations from other firms. You can reclaim the difference, if the input VAT is more than the output VAT.
For bookkeeping purposes, refer to the example below:
Your stationery shop purchases office supplies from a wholesaler for AED 500 plus AED 25 VAT. Your total payment will be AED 525.
- Debit: Office Supplies Expense (AED 500)
- Debit: Input VAT (AED 25)
- Credit: Cash/Bank (AED 525)
How to file VAT Returns
VAT-registered businesses must file VAT returns, usually every quarter, to report their output and input VAT. The report will feature your net VAT payable or refundable, which is the difference between output and input VAT.
For instance, in a quarter, your business collects AED 2,000 as output VAT and incurs AED 1,200 as input VAT. It will be accounted for as follows:
- Net VAT Payable: AED 2,000 (output VAT) – AED 1,200 (input VAT) = AED 800
- Net VAT Refundable: AED 3,000 (output VAT) – AED 3,500 (input VAT) = – AED 500
How A&A Associate can help
Accurate record-keeping is a challenging task for businesses of all sizes, let alone small firms. It involves thorough maintenance of detailed records of all your sales, purchases, and VAT amounts. Moreover, to avoid penalties, your VAT returns must be filed on time with the FTA.
Small business owners can outsource their bookkeeping to experienced tax consultants in the UAE so that they can focus on more pressing goals, like breaking even and executing marketing strategies.
We, at A&A Associate, offer expert accounting services to help you stay compliant with the UAE’s VAT regulations. Our team can assist you with VAT registration, filing returns, and ensuring that your VAT records are accurate and up-to-date. All you have to do is reach out to us:
Email: tax@aaconsultancy.ae
Phone: +971 56 511 1912
