VAT Law Review for SMEs: What are the Zero Rates and Exempt Supplies?

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April 16, 2024

With the release of Federal Law No. 8 of 2017 on VAT, articles 45 and 46 covered the anticipated lists of items of supply that are zero-rated and exempt. For the end consumer, the concept of zero-rated or exempt supplies would not matter as the supply would not increase the cost of the item once VAT is introduced. However, for small and medium-sized businesses this is a key concept to grasp as it could affect its business model, profit margins as well as its cash flow. 

A zero-rated supply means that the VAT charged on goods and services is at 0%, however, the business which makes zero-rated supplies is still able to reclaim its input VAT. Exempt supplies also mean that no VAT is added on goods and services supplied, however, the difference here is that a business making exempt supplies will not be able to claim back input VAT on purchases. The supply of goods and services subject to the zero rates according to article 45 of the VAT law includes:

  • The direct or indirect export outside the GCC implementing States (which is expected to be Saudi Arabia and UAE from 1 January 2018).
  • International transport of passengers and goods including related services.
  • Supply of air, sea, and land transport for passengers and goods including related services.
  • Supply of aircraft or vessels designated for rescue and assistance by air or sea.
  • Supply or import of investment precious metals; the first supply of residential buildings within three years of completion.
  • First supply of buildings designed and used by charities through a sale or lease.
  • First supply of buildings converted from non-residential to residential through sale or lease; supply of oil and natural gas.
  • Supply of educational services and supply of preventive and basic healthcare services.

The supply of goods and services which are exempt according to article 46 of the VAT law includes 

  • Financial services
  • Supply of residential buildings through sale or lease that is not zero-rated
  • Supply of bare land
  • Supply of local passenger transport.

It should also be noted that many of the detailed mechanisms and procedures for applying zero-rated and exempt supplies will be released in the Executive regulations which are expected to be released later in the year. A further complication, which should be considered by small businesses is the scenario where supplies are made which are partially exempt and zero/standard rated. This is covered by article 47 of the VAT Law and in this situation, the business would measure the portion of exempt and standard/zero-rated supplies made for a given period. If the split is 50:50 then 50% of the input VAT can be claimed against the output VAT paid and the remaining 50% input VAT would not be claimed and therefore would be expensed. The tax authorities would usually review this for around 12 months and if the mix changes, then a new proportion calculation is made. 

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This article has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.

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