VAT (value added tax) was introduced in the United Arab Emirates on 1 January 2018. The general rate of VAT is 5%, although some goods and services qualify for a 0% rate or are exempt.
Business owners often ask us about VAT registration and other VAT matters, because like most taxes, although the general rules are relatively straightforward, it can get complicated in some areas.
These are some of the questions we often encounter regarding VAT, and particularly around the threshold at which businesses should register for VAT.
These answers are for general guidance. For advice on your specific circumstances, we recommend that you speak with your accountant or another VAT expert.
Should my business register for VAT?
Your business must register for VAT if it is registered in the UAE and your annual turnover exceeds AED 375,000. This is based on your revenue activities over the last twelve months, or if you expect to exceed the limit in the next 30 days.
Registration in these circumstances is not optional. If you fail to register, you face being fined.
You can also register voluntarily under two different circumstances:
- Your annual turnover is below AED 375,000 but above AED 187,500.
- You have no turnover, but your expenses exceed the voluntary registration threshold.
The second option is intended for new businesses that have begun incurring costs but have not yet started generating revenue.
What are taxable supplies?
Taxable supplies are where your business sells goods and services on which VAT must be charged.
The general rate of VAT in the UAE is 5%, and this must be added to the cost of most goods and services. This means that for every AED 100 that you charge your customer, you must add AED 5 as VAT, making the total due AED 105.
There are some exceptions to this, which we discuss below.
What supplies are exempt from VAT?
There are two categories of supply on which you do not add VAT. These are zero-rated transactions and exempt transactions.
Zero-rated transactions mean that VAT is charged, but the VAT rate is 0%. Supplies that fall into the zero-rated category include:
- Export of goods and services outside the GCC (Gulf Cooperation Council) area.
- International transportation and related supplies.
- New build residential properties supplied within three years of construction.
- Supply of certain education and healthcare goods and services.
- Certain investment grade precious metals.
Exempt transactions include the supply of:
- Certain financial services.
- Residential properties and bare land.
- Local passenger transport.
These lists are not exhaustive, and you should take advice regarding the goods and services your business supplies.
Do zero-rated supplies count towards the VAT threshold?
Yes, they do.
While no VAT is charged on either zero-rated transactions or exempt transactions, the big difference between them is that the zero-rated revenue counts towards the VAT registration threshold.
Do I pay the full 5% VAT to the government?
The short answer is no, you don’t.
VAT is a tax on value that has been added through the supply chain and is ultimately a tax on consumers.
Your suppliers will, in general, charge you VAT on what you purchase from them. You can offset this VAT against the VAT you charge your customers, and you only pay the difference to the government.
Let’s say you buy AED 1,000 of supplies, on which you’re charged AED 50 in VAT, making the total charge AED 1,050.
You sell those supplies for AED 2,000, adding AED 100 in VAT, making the total charge AED 2,100.
You’re required to pay the AED 100 in VAT to the government. However, you can reclaim the AED 50 from the government – meaning your net payment is just AED 50.
VAT means you’re collecting tax from your customer, paying tax to your supplier, and paying the difference to the government.
Can I claim back all the VAT paid by my business?
The amount of VAT you can claim back depends on the VAT status of your taxable supplies. For every supply you make at the standard rate of VAT, you can reclaim the VAT on the associated costs.
Where it gets complicated is where your supplies are a mix of standard and zero-rated items. In this situation, you can only reclaim some of the VAT that you paid. We recommend that you work with a VAT specialist to calculate how much this should be, otherwise you could find yourself underpaying or overpaying VAT. If you underpay, you are liable for a fine.
Should I register for VAT when turnover is below the mandatory threshold?
There are benefits to registering for VAT once your turnover reaches the voluntary registration threshold of AED 187,500.
Registering for VAT allows you to start recovering the VAT that you have been charged by suppliers. However, it also means you must charge VAT on taxable supplies.
Whether or not this is beneficial for your business cash flow requires an assessment of your specific circumstances. If your customers are also businesses registered for VAT, they will be able to recover the VAT you charge them. But if they are small businesses or consumers, the VAT you charge is a cost to them.
Can I cancel my VAT registration?
If your turnover does not reach the threshold required for mandatory registration, or falls below it, you can choose to deregister for VAT. While this means you are no longer required to charge VAT on sales, it does mean you can no longer reclaim VAT on purchases. Again, it pays to take professional advice before making this decision.
Got more VAT registration questions? Get in touch with us.
VAT is a form of taxation used in well over one hundred countries and while the principles remain largely the same, the details differ from nation to nation. The UAE enjoys one of the lowest standard rates of VAT, at 5%.
If you have other questions about VAT, the registration thresholds, the benefits of voluntary registration, or the bookkeeping required for VAT accounting, we are here to help. Our VAT experts will be pleased to answer your queries and help you make the VAT decisions that are best for your business.