Is it worth registering for VAT? It is only 5%! My new clients, and even my friends, often ask this question, and I always write a mental note to myself that I will do an article about this one day. Thanks to Covid-19, that day has finally arrived.
What is VAT anyway?
VAT, or Value Added Tax, is one of the issues all businesses need to be aware of. It is crucial, for example, to understand what the ‘VAT threshold’ is and when you need to register for UAE VAT. It is also essential to consider what benefits you might get from registering even if you are below the threshold. This article aims to address these key points and answer the questions you might well have about VAT registration for your business.
VAT Registration requirement in the UAE
It is a legal requirement in the UAE to register for VAT once any business exceeds a turnover of AED375,000 over 12 months or is expecting to hit that threshold within 30 days.
Provided your previous 12 months turnover or expenses have reached AED187,500, or will reach this limit in the next 30 days, it is possible to apply to register early for VAT. Here are some of the benefits:
Benefits of registering for VAT
- As a business owner, you are eligible to claim a VAT refund on most business expenses but ONLY if you are registered. Taking a 5% hit on your costs is one thing, but if the rate went higher, how much would you be prepared to take? The VAT you pay, called ‘input tax’, could end up being more than the VAT you collect from your customers, the ‘output tax’ and you can collect the difference back from the tax authorities, saving you some money.
· Recovery of VAT incurred during business set up. For example, it might take you six months to design an e-commerce website and purchase stock. Still, in those six months, if you register for VAT, you can recover any VAT you have paid from the tax authority. It is possible to go back to the start of the business to reclaim any historic VAT you paid on expenses.
· It can make your business appear larger and more established than it is, earning you some additional respect and recognition. Customers, investors, and suppliers will assume turnover is over AED375,000 if the Business is VAT registered.
· Having a VAT registration number on your business correspondence can add credibility, which is particularly beneficial for a business. Especially as the UAE does not have a central registry of all Mainland and Free Zone registered companies, being centrally registered with the tax authorities adds credibility to your operation.
The potential downside of registering for VAT
· Business or profits may be affected if your customers are unable to recover VAT. It is essential to understand your customer base before voluntarily registering for VAT. If most of your clients are small and not registered for VAT, then maybe it is time to wait until you get large clients or reach the compulsory registration threshold.
· Impact on cashflow. If you are getting paid on 90 days terms but the VAT quarter falls before payment, you need to pay the Government before you receive the payment. For SME’s, cashflow is king, so take time to look at shortening your payment terms and ensure you have sufficient money in the bank. You are, however, allowed to claim back VAT on sales where the customer has not settled the debt over six months (bad debts), so it is not all bad news.
· Additional administration. Yes, this is true. Invoices will have to contain certain information, including the company’s and client TRN (Tax Registration Number). You will have to submit your VAT return quarterly and initially seek the advice of a qualified person who can steer you in the right direction.
In my experience, the most demanding task for small businesses is keeping essential business records. Proper record-keeping includes maintaining copies of expense receipts, separating business and personal income and expenditure and formulating a basic profit and loss and a balance sheet. Thanks to modern technology you can submit your VAT return with the click of a button. Stay tuned for my upcoming article on accounting software for SMEs. In the end, there is no excuse not to keep proper business records, whether you are VAT registered or not.
· Additional Penalties. The authorities may impose penalties for the non-payment of VAT, non-compliance and failing to provide information or access to information. For example, there is a fine of AED10,000 if a business does not keep proper records which goes up to AED50,000 for repeat offenders. Yes, you are more likely to be investigated by the tax authorities if you are VAT registered. However, the authorities may levy fines up to AED20,000 if your business has not disclosed when it has hit the relevant thresholds. It is crucial to know where you stand.
Still finding VAT complicated or have additional questions on the topic? Get in touch with me at jo@camdenhill.co.uk and we can talk you through the whole process.
Useful information on VAT
There are lots of free resources available on various VAT topics. The FTA (Federal Tax authority) has done a superb job in putting together a functional and well thought out website. Here are some one-page summaries that the FTA has put together which you might find useful.
© Jo Maye FCA – Camden Hill Accounting Services – May 2020
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