I don’t know about you, but since the headline that VAT is coming to the UAE, I have basically had my head buried deep in the sand hoping it would go away or be delayed for another couple of years by which time I may be out of my denial state!
But there is no avoiding it now, VAT is coming, effective from 1st January 2018, and its time now for me and anyone else out there acting like an ostrich to get our heads out of the desert and start finding out exactly what we must do and by when.
I did attempt to find out more details and was amazed at how little confirmed information there seemed to be out there to answer some pretty basic questions. However, I did find out the following:
- Any Company with earnings (not profit) of USD100K/AED375,000 is eligible to charge and pay VAT
- It affects all mainland registered Companies in the UAE
- At the moment, it appears that Free Zone companies do NOT charge for VAT their deliverables provided to other Free Zone companies, but we are waiting on a key document due out in October to confirm the full details of this.
So, all my “surely it won’t affect me” denial statements were blown away with the above. I need to add here I am not an Accountant and have very basic understanding of accounting - I am sure that I am not alone in the level of accounting understanding that small business’ have and this is where I am very grateful to work in partnership Caroline Thevenot, founder of an outsourced finance Company – CTC Consultancy http://www.ctconsultancyuae.com/ to help me understand the implications on my Company.
Here, Caroline and I attempt, using non-accountancy language, to help us all understand VAT, our obligations and what we need to do in the coming months to be VAT ready. Please understand that our comments below are based on our understanding and relevant information known at time of publishing:
- The first step you need to take is looking at how you currently record your accounts. If you do not have an accounting software or cloud solution, it’s time to get one or to outsource your accounting. There are any number of simple online accounting systems if you do not want to outsource. If you are hand typing your invoices and recording the details on a spreadsheet, it’s time to get your act together.
- Once you have a system you need to adapt the chart of accounts to include the Tax accounts and format your sales invoices to include the extra VAT line and the VAT registration number.
- To get your VAT registration number, you need to register your Company on the FTA portal that should be available from 1st
- Once everything is set up, you need to implement processes that keep everything up to date and tidy. All expenses and purchases should be in a folder filed on a month by month basis, stamp and number your expenses receipts and file them in order. All these tips will save you a lot of time during required audits.
- All your sales invoices should be in a separate folder, sorted by month and listed by order number.
- At the end of every quarter, you will have to calculate, declare and pay the VAT return for the months included in that quarter. Make sure that your book keeping is updated. Collect the data from your software: the account “VAT Collected” and the “VAT Paid”, the difference will be the VAT to be paid to the FTA.
- In some cases, the FTA may have to reimbursed you VAT. For example, if one quarter you buy a lot material, either for your Fixed Assets or an advance in stock, but you did not have many sales, the FTA will have to pay you back the VAT you paid on the material.
- If you have a team, then it’s advisable that you start including the implications of VAT into your weekly team talks – they need to understand the consequences on the Company cash flow and the importance of record keeping – losing receipts is no longer a valid excuse.
- Any invoice issued is due to be included in the quarters VAT return regardless if it has been paid by the client or if the services delivered.
- Any retainer contracts issued in 2017 that have deliverables and invoices due in 2018 need to be reviewed and potentially rewritten so that the client understands that effective from 2018, VAT will apply to the retainer from 1st January 2018.
- You may decide, as a Company, to “swallow” the VAT payment, therefore not charging your client and pay the VAT out of your margin. If you do decide to pay VAT from your non changed payment, consider what effect will this have on your forecasting for 2018 before you take this decision.
- To help with your cash flow, sales invoices should be issued at the time of delivery unless you have agreed to advance payment. If you do receive advance payment, even if you didn’t deliver, the VAT part of the advance needs to be included in the VAT received for the quarter.
- If an invoice is not paid by a client, you still need to pay VAT on this, so its extremely important that you remain on top on “bad debtors” and follow up on non payment.
- A very delicate point is the “Place of Supply”. If the deliverables are treated as made outside UAE, no UAE VAT will be charged. If the deliverables are treated as made inside the UAE, VAT will be charged. The tricky part is in the interpretation of the “Place of Supply”. Generally, if it is a service, it is where the supplier has the place of residence and if it is a good, it is where the good was at the time of supply.
- If you are a start-up and you don’t know when to register as you do not know your annual earnings, as soon as your sales/income reaches AED 375,000, you are eligible to register to the FTA and start completing VAT returns. This means that you need to know and follow up your accounts quite precisely!
- The FTA will conduct regular controls and tax audits, the companies who do not follow the rules and laws will be fined. As I understand this, the FTA are able to obtain data from Company bank accounts and therefore have access to our debits and credits.
I am sure, like me, this all sounds very complicated and you are feeling like putting your head back into the sand – but to quote Benjamin Franklin, “there are only 2 certainties in life: death and taxes”, given these 2 options, we had better get on with it and start making changes today that will help us ease into VAT and 2018.
Caroline Thevenot: Founder & CEO, with a French Masters in Economics & Business Administration,specialising in Finance, with over 20 years experience in SME companies and 12 years in Dubai, Caroline is a Finance Manager and CFO who is continuously inspired to work with start-ups and facilitate growth