The countdown to VAT has started. For the first time in their history, countries across the Gulf Cooperation Council (GCC) region will impose a 5% value added tax starting January 1, 2018.
As businesses in the UAE prepare for the introduction of VAT, legal and practical concerns abound, especially among SMEs. The country’s Federal Tax Authority (FTA) has set the mandatory VAT registration threshold at AED 375,000 (USD 102,000). VAT registration is required for businesses whose annual turnover over the past 12 months (or anticipated turnover in the next 12 months) is more than the threshold.
Accelerate SME spoke with Shiraz Khan, senior tax advisor at Al Tamimi & Co., and Andrew Prince, a financial services professional and director of Focus Groups at British Business Group (BBG) Dubai and Northern Emirates, on the implications of VAT and what steps SMEs must take to address these concerns.
Legal implications
Shiraz underscores the short- and long-term consequences arising from VAT.
“As agents for the government, SMEs will be required to collect VAT on behalf of the FTA, and there will be compliance obligations in place. In the short term, SMEs will need to ensure they are registered for VAT if there is an obligation to register,” he said.
Failure to register before the deadline – which was set on November 30, 2017 for businesses with an annual turnover in excess of AED 10 million (USD 2.72 million) and December 4, 2017 for all other business – carries a hefty late registration fine of AED 20,000 (USD 5,400), Shiraz noted.
“Additionally, if they are not registered for VAT, they will not be permitted to charge their customers VAT. However, they will still be required to account for VAT from 1 January 2018. As a consequence, they may pay for the VAT from their own pocket.”
He also advises very small businesses that are not required to register for VAT, to consider whether they should register to be able to recover VAT paid on purchases.
“SMEs will also need to review their contracts to ensure VAT has been passed on to their customers. The payment terms must also be assessed to prevent cash flow issues from arising,” the senior tax advisor said.
With regard to compliance obligations, tax invoices will need to be issued within 14 days of the supply of goods or services in a prescribed format while detailed records must be kept by SMEs.
“As VAT is a new law, over the long-term there is likely to be uncertainty in its application to many transactions. The FTA will likely actively audit VAT returns. SMEs will need to identify the correct VAT treatment for these transactions as penalties for errors, which are based on a percentage of the unpaid tax, can be substantial,” Shiraz said.
Practical implications
For business owners, the most obvious practical implication is that of record keeping, said Prince.
“You’d be surprised at the number of businesses that do not have audited accounts or even monthly management accounts, which become a huge stumbling block when trying to sell the business or raise finance, but in the absence of a legal requirement previously, [it is] almost understandable why some would skip them,” he said.
Prince, however, emphasized that there is more to VAT than funding public coffers.
“VAT is a tax, yes; however, it is more about systems and processes that should be integral with any well run, efficient business than a form of revenue collection,” he said. “2018 and 2019 will be challenging given the relatively short notice of some elements of legislation, but the principles have been well publicized, and training should have been given to staff over the past 12 months to help familiarize them with the processes involved.”
He added that many accountancy practices, business groups such as the BBG, and government entities have run workshops to help educate those involved.
Addressing concerns
Shiraz said that VAT itself, if properly managed, should not be a cost to SMEs. However, there will be a cost associated with compliance.
“SMEs should ensure that they register for VAT, file VAT returns and pay VAT on time. In addition, SMEs should take advice on their compliance obligations and VAT treatment for transactions, particularly where the position is uncertain,” he said.
Small business owners may also undertake a VAT impact assessment to help determine the effects of VAT on businesses at the operational, functional and operational level, he suggested.
“SMEs should also invest in accounting software that helps them account for VAT and that automates the issuance of VAT invoices,” Shiraz added.
Hiccups may be expected in the initial days following the VAT rollout, but Prince said once the settling-in period has elapsed, VAT returns, collection and payments will become seamless, and an integral part of the business processes.
“Business owners who are looking to expand into other markets, such as the UK and Europe will find it much easier. Owners looking to sell [their companies] will [inevitably] become more attractive to international acquirers as they will be able to ascertain with confidence the value within a business through accurate record keeping,” he said.
© Accelerate SME 2017
