The recently implemented value added tax (VAT) will undoubtedly change the way companies in the GCC region – both big and small – do business. VAT is currently in effect in the UAE and Saudi Arabia, and will soon be launched in other Gulf countries.

While it is extremely important in providing an additional source of public revenue for governments, to the accounting newbie, the new tax system can be quite confusing. But fret not, as Accelerate SME talks to Basit Hussain, leader of the Deloitte VAT Compliance Centre, who narrowed down five key questions (and answers) about VAT.

Question #1: How can I file my VAT return?

In the UAE, the Federal Tax Authority (FTA) maintains a dedicated e-services portal where VAT-registered businesses can file their VAT return.

“The VAT return [process] is fairly simple in its set-up, so filing should not consume a lot of time, particularly if the reports are automated through the accounting system,” said Hussain. “For payment of VAT liability, generally two methods are available: E-Dirham card and credit card.”  

FTA has also published a four-step guide on its website to help taxpayers in submitting their VAT returns.

Question #2: How long must I retain tax-related records?

For audit purposes, businesses are required to keep tax records for a certain period of time.

“Except in cases of proven tax evasion or non-registration for tax purposes, the FTA’s prescription period for audit is within five years from the end of the relevant tax period,” advised Hussain.

However, for real estate-related records, the retention period is 15 years. Businesses must maintain all documents related to:

  • goods and services that have been disposed of or unused for matters not related to business, showing tax paid for their acquisition;

  • goods and services purchased and for which the input tax was not deducted;

  • exported goods and services;

  • adjustments or corrections made to accounts or tax invoices; and

  • any taxable supplies made or received under the domestic reverse change mechanism, including any declarations provided or received in respect of those taxable supplies.

Question #3: When must I file my VAT returns?

If you’re a VAT-registered SME, the standard tax period shall be either monthly or quarterly, with each return to be filed not later than the 28th day of the month following the tax period.

“At the onset, the [FTA] has relaxed the first filing for many of the entities (e.g., some have first tax period of January to May, due for filing on June 28). This has been done primarily to facilitate their requirement to stagger receipt of the three monthly returns,” said Hussain.

However, he noted that as an exception to the standard tax period, a shorter or longer tax period may be assigned by the FTA to a taxpayer with the following considerations:

  • in order to reduce the risk of tax evasion;

  • to enable FTA to improve the monitoring of compliance or collection of tax revenues; and

  • to reduce the administrative burden on the FTA, or the compliance burden on the taxable persons.

A taxpayer may also request the FTA for a different tax period, but this will be subject to the authority’s approval.

Question #4: What are the things I must be careful of when filing my tax returns?

Hussain pointed out that there are certain aspects of VAT that require specific attention, such as:

  • Emirate-by-emirate reporting – Sales and related output VAT must be reported according to the emirate where the business is located. The recently published document on VAT return filing by FTA explains how this has to be reported, said Hussain.

  • Reverse charge mechanism – For goods and services provided by foreign suppliers, businesses in the UAE must include in their tax return both the input VAT (the recipient’s purchase) and the output VAT (the supplier’s sale). “Though this may seem to net off the input and output VAT in normal circumstances, for businesses that only make taxable (and zero-rated) supplies – in cases of exempted sales – the reverse charge may result in additional VAT liability,” he said.

  • Goods imported into the UAE – Hussain added that the VAT return will pre-populate the amount based on the custom declaration. “However, the FTA expects all companies to check and reconcile with their own records. In case of incomplete or inaccurate numbers, adjustments are to be applied in the VAT return, so this should be reconciled to the actual [records].”

  • Non-business use of expenses – According to Article 53 of the VAT Executive Regulation, input VAT on entertainment, motor vehicle available for personal use, or any other goods and services purchased to be used by employees for no charge and personal benefit cannot be recovered. Hussain suggests taxpayers to err on the side of caution.

Question #5: What challenges can I expect with the new VAT system?

Hussain warns that SMEs may initially find VAT-compliance to be challenging because in the absence of any tax system in the past, SMEs were not required to observe record-keeping practices.

“With the implementation of VAT, [businesses] are now required to invest in systems and resources [that organize] proper accounting records, [observe] timely closing and cut-off procedures, as well as bill customers in line with VAT requirements,” he explained. “In filing their returns, taxpayers, if not confident in their systems, should consider over paying rather than reporting a shortfall.”

© Accelerate SME 2018