Just like corporate tax, value-added tax (VAT) is also an integral part of the tax collection system in the UAE. It is applicable in most of the developed economies worldwide. However, it started on January 1st, 2018, in the UAE. For businesses, VAT is not just a tax; it is a system that impacts entities in various ways, from financial management to compliance. In this blog, we will specifically focus on VAT compliance for SMEs and its impact on businesses in this region.
Understanding VAT
It is an indirect tax and is one of the types of consumption tax globally.
The Law defines VAT as,
“A tax is imposed on the import and supply of goods and services at each stage of production and distribution, including the deemed supply.”
The “Value Added” in the Financial System
It is often discussed how the VAT system contributes to the financial system. In VAT, businesses are agents of the government that collect and account for VAT on behalf of the government at every stage of the supply chain. However, the end consumer is the one who endures the cost. Generally, a business pays the tax to the government it collects from the customers. On the other hand, it also claims a refund from the government it paid to its suppliers. The net result is the tax receipts of the government, which reflect the “value added” in the supply chain. The amount of purchases is usually lower than the amount of sales; therefore, the net result is usually tax payable to the government.
The Importance of VAT Compliance for SMEs
Non-compliance will result in adverse circumstances, including penalties. Let’s dig out some key factors.
Penalties
Violations of tax laws and regulations will result in fines.
- Late Filing
Late VAT filing will result in AED 1,000 for the first offense. However, in case there is a repeated offense, the penalty will rise to AED 2,000.
- Late Payment
The Taxable Person is liable to pay the penalty applicable to late payment of payable tax up to a maximum cap of 300%. This is pursuant to the following:
• (2%) of the unpaid tax is due on the day following the due date of payment.
• (4%) as a monthly penalty applies after one month from the due date of payment, then on the same date every month thereafter, on the unpaid amount to date.
- Late Registration
In the event of late registration after exceeding the threshold, a hefty fixed penalty of AED 10,000 will be incurred. Furthermore, if there are any back-dated VAT liabilities, the entity will be liable to pay those as well.
Risk of Losing Reputation
A compliance business is most likely to achieve good repute in the business environment. Investors, vendors, and other stakeholders always prefer to deal with compliant entities.
Audits
Non-compliance will result in a higher risk of FTA scrutiny and audits. This, in turn, will divert the business from core operations. Thus, it will impact the overall business of the entity.
Better Cash Flow Management
There are instances where SMEs bear the opportunity cost of not claiming input VAT due to non-compliance. Therefore, it is important to weigh the benefits of registering for VAT voluntarily even if they do not meet the mandatory threshold.
Cash flow management and pricing strategies are two of SMEs’ most important financial aspects. Firms need to manage cash flow effectively to ensure they have enough liquidity to pay VAT and recover VAT on their sales and purchases, respectively. Furthermore, businesses now need to adjust their pricing strategies to account for the VAT charged on goods and services. This, in turn, can affect their competitiveness and profitability.
VAT-Related Compliance Responsibilities for SMEs
There are several aspects of VAT compliance specifically for small and medium-sized enterprises. However, we focus on the common and important ones.
VAT Registration
A business must register for VAT if:
- The taxable supplies and imports exceed the mandatory registration threshold of AED 375,000.
- However, a business can also register for VAT voluntarily in the case of taxable supplies and imports of less than AED 375,000 but higher than the voluntary registration threshold of AED 187,500.
- Furthermore, a business can also register for VAT if its expenses exceed the voluntary registration threshold. This is mainly for startups that have no turnover.
As an SME, you might need to get VAT registered voluntarily to get the benefit in the form of claiming VAT refunds. However, it is better to consult an expert, like CZTA.
Core VAT Requirements
To comply with the VAT laws and regulations, entities:
- Must charge VAT on the taxable goods and services supplied.
- May claim VAT on business-related purchases of goods and services.
- Maintain all the relevant records.
- Must file VAT returns on a timely basis.
It is worth noting that record-keeping is a must for every business in the UAE, both VAT-registered and unregistered.
Record-Keeping of Additional Documents:
As per UAE laws, every business must maintain accounting records that include payments, receipts, purchases, sales, profits, and expenses. VAT-registered businesses must maintain the following additional documents for a minimum of 7 years. However, certain categories of business may require a longer retention period.
- Records of all supplies and imports of goods and services.
- All tax invoices, tax credit notes, and alternative documents were received and issued.
- Records of goods and services that have been disposed of or used for matters not related to the business.
- Records of goods and services purchased for which input tax has not been deducted.
- Records of exported goods and services.
- Records of adjustments or corrections to accounts or tax invoices.
VAT Account
Furthermore, a VAT-registered business must maintain a VAT account or record that shows the following items:
1. The output tax due on taxable supplies.
2. The output tax due on taxable supplies via the reverse charge mechanism.
3. The accrued output tax after correction of any errors or adjustments.
4. Input tax recoverable on supplies or imports.
5. Input tax is recoverable after the correction of any errors or adjustments.
Conclusion
VAT compliance for SMEs is similar to any other firm operating in the UAE. However, as a small firm, there is a possibility that VAT registration is not required due to low revenue. In such a case, there will be no need for VAT filing, but they must maintain documentation. Furthermore, SMEs may need to look for voluntary registration if the benefits outweigh the costs. For instance, claiming VAT refunds on certain purchases. Therefore, it is advisable to consult an expert for proper tax optimization.
In addition to core compliance responsibilities, firms must adhere to record-keeping requirements. Generally, every business must maintain records; however, VAT-registered businesses must maintain additional documentation for a specified period. Furthermore, it is important to understand the difference between corporate tax & VAT and their interplay.
Creative Zone Tax & Accounting (CZTA)
Keeping up with the business operations and complying with the tax laws is complex and may impact your business. As a small entity, the focus must be on growth without any hassle of compliance issues. The VAT filing, corporate tax, and other responsibilities may halt your growth. Therefore, we offer tax & accounting packages to keep your business on track. Contact us today for tailored solutions.
