Value-added tax (VAT) became applicable in the UAE on 1st January 2018. The standard rate is 5% for most taxable supplies; however, there are also zero-rated and exempt supplies. Businesses must register for VAT. However, this is dependent on the business’s turnover, as given in the form of VAT registration thresholds in the UAE. There are generally two cases in this regard: mandatory VAT registration and voluntary VAT registration. Let’s explain the basics in a bit of detail.
What is the Mandatory VAT Registration Threshold in the UAE?
VAT is primarily governed by the Federal Decree-Law No. (8) Of 2017 on Value Added Tax. However, other regulations and decisions make up the overall UAE VAT framework. Specifically, the Cabinet Decision No. 52 of 2017 quantifies the VAT registration thresholds.
Mandatory VAT Registration Threshold
A business must register for VAT:
- If the total taxable supplies and imports exceed the mandatory VAT registration threshold, AED 375,000, in the preceding 12-month period.
- Where it is anticipated that the total value of all taxable supplies and imports will exceed the mandatory registration threshold (AED 375,000) in the next thirty (30) days.
Non-resident businesses dealing in taxable supplies in the UAE might need to register for VAT irrespective of the threshold. The authority may exempt a taxable person from mandatory tax registration upon request if the supplies are only subject to the zero rate. Failure to register for value-added tax will result in non-compliance, and a penalty of AED 10,000 is applicable.
What is Voluntary VAT Registration, and Who is Eligible?
An entity that is not obligated to register for VAT mandatorily can register for VAT voluntarily in the UAE; however, it is subject to a threshold.
Voluntary VAT Registration Threshold
A business can register for VAT in the UAE voluntarily in the following cases.
- If the total taxable supplies and imports exceed the voluntary VAT registration threshold, AED 187,500, in the preceding 12-month period.
- Where the business anticipates that the total value of all taxable supplies and imports will exceed the voluntary registration threshold (AED 187,500) in the next thirty (30) days.
The entity should be able to provide evidence of an intention to make taxable supplies or incur expenses that are subject to tax in excess of the Voluntary Registration Threshold.
What Counts as Taxable Supplies When Calculating VAT Thresholds?
A taxable supply is the supply of goods or services for a consideration 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.
When does Voluntary VAT Registration Make Sense for a Business?
There can be situations where a business is not required to register for VAT; however, they do so on a voluntary basis. This is, of course, dependent on meeting the required threshold mentioned above. There are actually various reasons why an entity might find it beneficial for their business. However, this depends on specific circumstances and the nature of the business. Let’s highlight some of the common reasons when voluntary VAT registration makes sense for a business.
- To recover VAT on eligible purchases or expenses – A business cannot recover input VAT if it’s not registered for VAT. However, there are other conditions to meet to recover VAT.
- To ensure that the incurred VAT is not included in the price. This, in turn, will result in higher pricing as there will be no recovery of input VAT. Therefore, registration can solve this problem.
- To get the TRN to get cash flow advantages – This is applicable when an entity purchases goods from outside the UAE and can use the reverse charge mechanism.
Summary
Just like corporate tax, a UAE business has VAT-related responsibilities. One prime responsibility is to register for VAT. The UAE VAT law introduced VAT registration thresholds to keep clarity and simplicity for taxable persons. These are the mandatory threshold and the voluntary threshold. Taxable supplies above the mandatory threshold in a specified period mandate a UAE business to register compulsorily. However, a business can also register for VAT voluntarily; however, the taxable supplies must be over the voluntary threshold (considerably lower). Some businesses prefer to register for VAT if not required to do so to claim VAT refunds; however, other particulars must be fulfilled.
Creative Zone Tax & Accounting (CZTA)
In the UAE, we excel in providing top-notch tax services to businesses, including VAT and corporate tax. The VAT registration thresholds might be tricky to handle for most UAE businesses. That’s where we come to play. Not just registration, we provide services beyond, including VAT filings. Contact us for further information.
Frequently Asked Questions (FAQs)
What are the VAT registration thresholds in the UAE?
Businesses in the UAE are required to register for VAT if their taxable supplies and imports exceed a certain amount within a specified time period, known as the VAT registration threshold.
What is the mandatory VAT registration threshold in the UAE?
It is AED 375,000. This means that businesses must register for VAT if they have made taxable supplies and imports exceeding AED 375,000 in the preceding 12-month period or are expected to exceed this amount within the next 30 days.
What is the voluntary VAT registration threshold in the UAE?
It is AED 187,500. Businesses exceeding taxable supplies and imports of AED 187,500 in the preceding 12-month period or expected to exceed it in the next 30 days can register for VAT voluntarily.
What is a taxable supply?
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.
Why do businesses opt for voluntary VAT registration?
A business may opt for voluntary VAT registration even if it is not obligated to do so to get most cash flow benefits, such as
- Claiming VAT refund – input VAT
- To minimize the impact of VAT incurred on their sale prices
- To get cash flow benefits when purchasing goods from abroad and applying the reverse charge mechanism.
