Most people have a preconceived notion that VAT (Value Added Tax) is a burden for all including small businesses. However, if your business is organized with the help of a VAT expert, VAT may not be too onerous for you. Although VAT in the UAE and the GCC is a very new concept, it is already administered in 193 countries as a VAT or Sales Tax. This means that many other small businesses around the world would have also had to prepare in one way or another, which we will address here.
Understanding the rules
The first thing a business should do is to understand the VAT rules to see how they will affect them. This can be done with the help of a VAT expert. In some cases, the charge and submission of VAT may not be necessary and in other cases, it may be beneficial to a business to register as it could be paying more than collecting VAT which would mean it would be getting repayment from the government regularly. Furthermore, failure to understand the rules could also result in fines and business suspension.
Accurate record-keeping is one of the most important requirements for VAT registered businesses from the outset. It's easier to record whether an expense is for business, entertaining or private use at the time you enter expenses into the accounting or bookkeeping system. In a computerized system, you can calculate VAT returns within half an hour if the records are correct. At Alpha Pro Partners, we recommend Xero, a cloud-based accounting system. Record keeping is also important from a statutory perspective because it is likely that all records will need to be kept for a minimum of 6 years just in case the regulatory authorities are to investigate the business. It may also be a legal requirement to issue VAT invoices to customers who pay VAT.
Small businesses also need to manage cash flow when paying VAT. The payment of VAT is likely to be quarterly but with almost 5% of the quarterly revenue being paid out every three months, cash strapped businesses need to be very careful to prioritize the VAT payment because there may be powers given to the VAT collectors to shut down a business for non-compliance.
Preparing for registration should not be a difficult task as this can be outsourced to a VAT expert, however, it is vitally important that the correct information is filed about the business to the VAT collectors. The wrong amount of information can lead to incorrect VAT assessments of the business and therefore cause disruption.
Training staff on the implications of VAT, especially in the UAE is important as this would be a new concept for people who live and work locally. Staff would need to know how to explain to customers and suppliers the requirements of VAT and how it affects business transactions. They will also need to ensure adequate record keeping and make sure that appropriate goods and services have the VAT marked up and that the correct documentation is collected also.