The standard rate of VAT in the UAE is 5%, which applies to most taxable supplies. However, some supplies are exempt from VAT; therefore, there is no VAT applicable. Furthermore, certain taxable supplies are zero-rated where a 0% VAT applies. Other than rates and exempt status, there are technical differences between these supplies’ types. In this blog, we mainly understand taxable vs. exempt supplies under UAE VAT and their importance and applicability for businesses. The primary legal framework of this explanation is based on the UAE VAT Law, Federal Decree-Law No. 8 of 2017 on Value-Added Tax.
What are Taxable Supplies under UAE VAT Rules?
A taxable supply is the supply of goods or services in exchange for a price by a person conducting business in the UAE. It does not include exempt supply. Therefore, there are three conditions for a supply to be a taxable supply:
- It is either the supply of goods or services.
- There should be a consideration or a price.
- The supply must be made by the person conducting business in the UAE.
A taxable supply can be either subject to the standard rate or the zero rate of VAT. Furthermore, a supply cannot be a taxable supply if it is an exempt supply. Any supply that is neither a taxable supply nor an exempt supply is outside the scope of UAE VAT. Examples of taxable supplies include, but are not limited to, electronics, apparel, vehicles, hospitality, and so on.
What are Exempt Supplies under UAE VAT Rules?
A supply of goods or services for consideration while conducting business in the UAE, where no tax is due and no input tax may be recovered, except according to certain provisions of the VAT law. Exempt supplies are not taxable supplies for VAT purposes. VAT is not charged on exempt supplies, and the supplier cannot recover any VAT on expenses incurred in making those exempt supplies.
Exempt supplies are listed in the UAE VAT law, such as:
- Financial services, including life insurance and reinsurance of life insurance. Furthermore, financial services that are not conducted for an explicit fee, discount, or similar type of consideration.
- Residential buildings, other than the specifically zero-rated residential buildings.
- Bare land.
- Local passenger transport
Taxable vs. Exempt Supplies under UAE VAT
Now we have understood the basics of VAT supplies; however, there are technical differences between them. Let’s highlight some of the important differences between taxable and exempt supplies.
- For taxable supplies, there is either 5% or 0% VAT applicable, depending upon whether the supply is standard-rated or zero-rated, respectively.
- For exempt supplies, there is no VAT chargeable on supplies.
- If a business’s supplies are all exempt, they do not have to register for VAT. However, they cannot recover VAT incurred on business expenses.
- In case of business dealing in taxable supplies, certain thresholds determine whether the business must register for VAT, mandatorily or voluntarily. For instance, an entity must register for VAT if its taxable turnover (which includes zero-rated supplies) exceeds AED 375,000 in 12 months or is expected to exceed AED 375,000 in the next 30 days. However, a business may opt for voluntary VAT registration if taxable supplies exceed AED 187,500 in the last 12 months or are expected to exceed in the next 30 days.
Why is it Important to Classify Supplies Correctly for VAT Purposes?
One of the primary VAT compliance responsibilities of a UAE business is to appropriately classify the supplies to correctly account for output and input VAT. Furthermore, VAT accounting is actually dependent on the type of supplies; therefore, any misclassification will result in incorrect VAT returns, which can ultimately result in penalties. Therefore, it is ideal to consult an expert, such as CZTA, to get assistance concerning the VAT accounting and filing. Correct classification enables businesses to:
- Accurately calculate VAT
- Avoid under- or overpayment of taxes
- Recover input VAT where applicable
- Maintain compliance with VAT laws & regulations
- Avoid penalties.
How Can CZTA Help Businesses Determine the Correct VAT Treatment for Taxable and Exempt Supplies?
Creative Zone Tax & Accounting (CZTA) is an FTA-approved agency providing tax & accounting services across the UAE. In line with UAE VAT regulations, our team assists entities in determining the correct VAT treatment. Our experts correctly classify taxable vs. exempt supplies under UAE VAT. Our team professionally:
- Reviews business transactions
- Classifies supplies correctly into taxable & exempt supplies.
- Assists businesses in maintaining compliance with VAT laws & regulations.
- Minimize errors during filing & risk of penalties.
- Handles VAT audits
Contact us for expert guidance on VAT treatment, filing, and ongoing support.
Frequently Asked Questions (FAQs)
A taxable supply is the supply of goods or services in exchange for a price by a person conducting business in the UAE. It does not include exempt supply. Examples include electronics, apparel, etc.
A supply of goods or services for consideration while conducting business in the state, where no tax is due and no input tax may be recovered, except according to certain provisions of the VAT law. Examples include bare land, local passenger transport, etc.
Taxable supplies are subject to VAT, while exempt supplies are not subject to VAT. Businesses making taxable supplies may recover input VAT in making those supplies. However, businesses cannot recover input VAT in making exempt supplies.
Accurate classification assists businesses in:
Accurate calculation of VAT
Avoiding under- or overpayment of taxes
Recovering input VAT where applicable
Maintaining compliance with VAT laws & regulations
Avoiding penalties.
Taxable supplies allow businesses to recover input VAT incurred on related services. However, it is subject to conditions. On the other hand, exempt supplies generally do not allow businesses to recover input VAT incurred on related expenses. This, in turn, results in a higher cost to the business.
