Understanding VAT in the UAE

What is VAT?

Value-Added Tax (VAT) is a consumption tax that is levied on the sale of goods and services in the United Arab Emirates (UAE). The UAE introduced VAT in 2018 as part of its efforts to diversify its economy and reduce reliance on oil revenues. Only businesses who are registered for VAT and have a Tax Registration Number (TRN) are able to charge VAT.

How VAT works for small businesses

VAT is charged at a rate of 5% on most goods and services, with some exceptions for certain essential items such as food, healthcare, and education. Businesses registered for VAT are required to charge VAT on the goods and services they sell, and to remit the tax collected to the Federal Tax Authority (FTA).

VAT is a self-assessment system, meaning that businesses are responsible for calculating, reporting, and paying VAT on their own. Businesses must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of 375,000 AED per annum. If your business reaches 375,000 AED you must register for VAT within 30 days, or you will b fined. Businesses can also voluntarily register for VAT when they reach the minimum threshold of 187,500 AED.

VAT returns must be filed on a quarterly basis, and businesses must keep detailed records of their VAT transactions to ensure compliance with the rules. Non-compliance with VAT rules can result in penalties and fines.

How to register for VAT

You can register your business for VAT through the Federal Tax Authority directly yourself, or you can engage an accountant or accountancy firm to help you with the process.

You will be asked by the Federal Tax Authority to submit proof that you have met the minimum threshold for VAT registration. This will usually include copies of invoices and potentially bank statements.

What do you need to have in place in your business?

It is important that as a business, you keep your financial records separate from your personal account. This means that if you have a licensed business, you need to have a business bank account.

You also need to have an online accounting system to record your transactions so that you can very quickly see how much is going into and out of your business. You should be reviewing the financial health of your business at least every month, even if you only have a few transactions a month.

VAT registration is good for your business!

You should not be afraid of getting your company VAT registered - and definitely don't try to postpone registration until the last minute.

When you're VAT registered it shows that you are a business of a certain size, typically a six figure business. Everyone wants a six figure business right?! Not only that, but potential customers or clients are more likely to trust you and see that your business has staying power. Some companies or government departments won't even consider registering a business on their procurement systems until they have a tax registration number.

If having a six-figure business, or getting the opportunity to bid for more contracts doesn't convince you - it saves you money, because you also get to claim back VAT on most goods that you purchase for your business too! Just remember that every single invoice you receive from a supplier needs to have their VAT number and your VAT number on it so you can claim back that tax!