Introduction of VAT in the UAE

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April 16, 2024

On the 24th of February, it was announced by His Excellency Obaid Al Tayer that the UAE will implement VAT at the rate of 5% from 1 January 2018. This is in line with the neighboring GCC states also implementing VAT at around the same time or by 1 January 2019 at the latest. These measures have been taken by the Oil-rich GCC states to further diversify their economies away from hydrocarbons and into more sustainable sovereign income.

VAT is a popular consumption tax that is implemented by over 150 countries around the world; a variant of VAT, called Sales Tax is also similar to it but differs slightly in its implementation. It is an indirect tax on consumption that is charged and collected at each step of the supply chain and is ultimately paid by the final consumer of the good or service. Although the rules and regulations on VAT are yet to be published, it has been announced that there are likely to be exceptions for basic food items, healthcare, and education with the rate of VAT varying between 3 and 5 percent.

There will also be many phases during implementation, with phase one requiring companies with annual revenues of over Dh3.75 million to register for VAT, and companies whose revenues range between Dh1.87 million and Dh3.75 million will have the option to register. During phase two, it is likely that registration will become obligatory for all companies but the ministry is still discussing a date for that.

It is also understood that as a result, the UAE stands to earn estimated revenues of between Dh 10 billion and Dh12 billion in the first year of its application.

What does this mean for small businesses?

Although the implementation of VAT is more than a year away, small and medium sized businesses should be looking at their business models now to decide whether they need to prepare. Although revenue limits of the business are a major factor, so too is the type of business as a business may be engaged in activities where VAT may in most cases be a net receipt.

Other factors to consider are also ensuring that receipts and invoices can be modified to include and collect VAT information, ensuring that accurate and real-time accounting records are being collected, and keeping all financial transactions stored in a secure and easy to review location. Accurate Cash flow reporting is also a very important factor to consider as VAT is likely to be paid quarterly. If the business does not manage its cash flow to time its quarterly payments, penalties and fines for late payments could be charged.

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