Value Added Tax (VAT) is one of the most prevalent forms of consumption tax found worldwide. Countries levy VAT on the majority of supplies of goods and services that are bought and sold.
Value Added Tax (VAT) was instituted in the UAE in January 2018 through the publication of the Federal Decree-Law No. 8 of 2017, at a rate of 5%.
In 2022, the official gazette published the Decree-Law No. 18 of 2022, which brought forward certain changes and amendments on the pre-existing laws on VAT. The provision that allows registered people to request for an exclusion from VAT registration if all of their supplies are zero-rated or if they no longer make any supply other than zero-rated supplies is one of the amendments made to Federal Decree Law No. 8 of 2017 on VAT.
Supplies of goods and services that are taxed at a rate of 0% are known as zero-rated supplies. Certain foods and drinks, exported products, donated goods sold by charity stores, equipment for the disabled, and prescription drugs are some examples of zero-rated commodities, which are chosen by the taxation authorities. With relation to the following primary types of supply, VAT shall not be assessed:
- Goods and service exports beyond the GCC
- Transportation internationally and related materials
- Supply of certain land, sea, and air vehicles, including ships and aircraft
- Many investment-grade precious metals, such as 99% pure gold and silver,
- Residential homes that have just been built and are made available for the first time within three years
- the provision of specific educational services and the provision of pertinent products and services
- the provision of specific healthcare services and the provision of pertinent goods and services
Furthermore, the following types of supply shall be completely exempt from VAT;
- the supply of some financial services (clarified in VAT legislation)
- Residential properties
- Vacant land
- local passenger transportation
Whereby an input tax paid by a VAT-registered person on business expenditures is related to a taxable supply the registered person has made or intends to make, the input tax can be fully reclaimed. In contrast, the registered person is not permitted to reclaim the input tax that was paid when the expenditure pertains to a non-taxable supply (such as exempt supplies).
When a registered person makes supplies, a cost may be related to both taxable and non-taxable supplies (such as activities of the banking sector). The registered person would have to divide the input tax between the taxable and non-taxable (exempt) supply in this situation. Although there will be exist the option to apply alternative techniques where they are fair and have been agreed upon with the Federal Tax Authority, businesses will be required to utilize input tax (ratio of recoverable to total) as a basis for apportionment in the first instance.
If a business’s taxable imports and supplies surpass the AED 375,000 level for required registration, they shall have to register for VAT. Additionally, a company may elect to register for VAT voluntarily if its imports and supplies are greater than the AED 187,500 voluntary registration barrier but less than the required registration requirement. Correspondingly, if a company’s costs reach the optional registration level, they may register voluntarily. The purpose of the later voluntary registration option is to make it possible for new firms with no revenue to apply for VAT.
In the United Arab Emirates, all companies are required to keep track of their financial activities and make sure their financial records are correct and current. Companies must register for VAT if their financial records show that they have the requisite minimum yearly turnover. Companies who do not believe they should be registered for VAT should still save their financial records in case there is a need for clarification on whether they should be.
Businesses that are registered for VAT in the UAE, must impose a VAT on any taxable supplies of goods or services. They may be able to recover any VAT that they spent on products or services used for the business. They must maintain a variety of company documents so that the government may verify that they are doing things correctly.
If your business is registered for VAT, you must regularly disclose to the government how much VAT you have collected and how much VAT you have charged. There will be an official submission, and digital reporting may also be likely. It is mandatory to pay the government any remaining differences if the VAT charged by the company was more than the VAT paid by them. However, if the VAT paid is more in value than the VAT charged, it can also be recoverable.
With regards to real estate, the VAT treatment is dependent on whether that property is residential or commercial. Commercial real estate services are taxed at the usual VAT rate (i.e., 5%) on all supplies, including sales and leases. Alternatively, residential property supplies are often free from the VAT. This guarantees that people who purchase their own residences won’t incur an irrevocable expense from VAT. The initial delivery of residential homes made within three years of their completion at the time of the introduction of VAT is zero-rated to guarantee that real estate developers can recoup VAT on the building of residential properties.
VAT is often charged on goods and services provided by governmental bodies. This guarantees that governmental organizations do not unjustly outperform private companies.
Nonetheless, if they are not in direct rivalry with the private sector or if the entity is the sole supplier of such products, certain supplies made by government entities will be exempt from the VAT’s application. In order to prevent financial problems and create a fair playing field between insourced and outsourced activity, certain government bodies are eligible to VAT refunds.
The way in which goods delivered to government organizations are handled relies on the supply itself, not the recipient. Hence, even if the supply is given to a government entity, the treatment shall remain the same if it is subject to the regular tax rate.