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VAT in the UAE:

What's VAT?

The Value Added Tax, or VAT, is a tax on consumption & is collected on business transactions and imports. The basic principle is to charge VAT at each stage in the supply of goods and services (output tax). If the customer is registered for VAT and uses the supplies for business purposes, he will receive credit for this VAT (input tax). The broad effect is that businesses are not affected and VAT is actually borne by the final consumer.

How does VAT work?

Taxable persons charge & add VAT to the value of supplies (goods & services) they sell. Such Taxable persons can reclaim VAT incurred on goods and services purchased for business purposes (subject to certain restrictions) such as the purchase of raw materials & other consumables used for business purposes.

Registration Threshold:

A business must register for VAT if their taxable supplies and imports exceed the mandatory registration threshold of AED. 375,000. Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED. 187,500.

Reverse charge:

When any registered person imports, acquires or buys goods or services from abroad, that person must pay any VAT that is due. The mechanism for this depends on whether the goods or services are received from the GCC and the specific rules in each member state. Reverse charge is a mechanism under which VAT is required to be paid for the goods or services by the recipient instead of the supplier when the supplier is not a resident in the member state where the supply takes place. When the reverse charge is applied, the recipient of the goods or services makes the declaration of both their purchase (input VAT) and the supplier's sale (output VAT) in their VAT return. In this way the two entries cancel each other from a cash payment perspective in the same return.

VAT Compliance requirements:

  • VAT registered business must record, assess and report its VAT obligations to the tax authority in accordance with the applicable law
  • VAT registered businesses are required to file the VAT Return usually by the end of the calendar month following the end of the reporting period, which may be monthly or quarterly.
  • Remitting any VAT payable by a specified date.
  • Record keeping, documentary evidence to support VAT credit claims, in respect of all business transactions, tax invoices, debit or credit notes, Import & export records
  • Records of goods & services provided for free or allocated for private use, Zero rated or VAT exempt supplies and purchases
  • The remitting of VAT either on a monthly or quarterly is a serious business consideration in view of the potential cash flow implications for the business.
  • - Additional considerations also be prescribed requirements pertaining to the use of electronic records, preparation of VAT audit files, time and format of records to be accessible for a VAT audit, amongst others

It's known from experience of other mature VAT jurisdictions that businesses often struggle to address questions raised during a VAT audit by the tax authorities due to the inability to produce the complete audit trail of documentation to substantiate liabilities and entitlements reported within the VAT return.

Due to the transactional nature of VAT it would be prudent for businesses implementing VAT to put in place a combination of automated processes and tools in order to produce a VAT audit file, upon request by the tax authorities.

Don't forget your VAT adjustment:

Partial exemption

As a partially exempt business you're required to review the VAT you've reclaimed over the previous twelve months and make an annual adjustment. What should you be looking out for to ensure you've maximized your claim?

One of the basic VAT rules is that you can't reclaim VAT on purchases which you use to make exempt sales. However, some expenses, essentially overheads, such as premises and IT costs, may be used in the process of making exempt and VATable sales. This is known as residual VAT and you're entitled to reclaim a proportion of it.

Standard Method of Apportioning Residual Input Tax:

Input Tax Method:

This method of allocation of residual input tax is as follows: Recoverable input tax / Recoverable and non-recoverable input tax This percentage is applied to the residual input tax.

Capital Asset Scheme

Under the Capital Asset Scheme, the input tax initially recovered is adjusted based on the actual use of a capital asset during a specific period.

A capital asset for these purposes is a single item:

Costing AED 5,000,000 or more on which VAT is payable; and Having an estimated useful life of at least 10 years for buildings or at least 5 years for all other assets. (Art. 57 of the Regulations)

Where costs are settled in stage payments, as is often the case for buildings, the overall cost is considered as one sum. (Art. 57(3) of the Regulations) Stock is specifically excluded from the capital asset scheme. (Art. 57(2) of the Regulations)

The Operation of the Scheme:

The initial recovery of input tax when a capital item is purchased follows the normal rules. In the VAT period of acquisition input tax recovery is claimed subject to any partial exemption position. This is the normal method for input tax recovery, but it is not appropriate to leave it at that for some capital assets. These are assets over a number of years. Years for these purposes are VAT years. The first VAT year for an asset starts on the date it was purchased. The accounting date of the business for direct taxes is not relevant. For qualifying capital assets, the input tax recovery is effectively based on a longer period of account, with adjustments made where necessary.

The length of the adjustment period in years depends on the type of asset. (Art. 57(1) of the Regulations)

The recovery period for buildings is 10 years.

The recovery period for other capital assets is 5 years.

Year 1 will always be the year of first use and this recovery is calculated as normal. This effectively means we have to consider a further 9 adjustments for buildings and a further 4 for other relevant assets.

Input Tax Recovery Conditions

In order to claim the input tax credit (ITC) the following conditions must be satisfied:

  • Recipient must be a taxable person and must be registered for VAT
  • VAT on the purchase must have been correctly charged by the supplier
  • The goods or services have been acquired for an eligible purpose
  • Recipient must receive and retain a tax invoice evidencing the transaction
  • The amount of VAT which the recipient seeks to recover must have been paid in whole or in part, or intended to be paid in whole or in part
  • Certain incurred ITC specifically blocked from being recoverable regardless of whether the above conditions have been met

Why bookkeeping is important?

Accurate, reliable & timely financial information is one of your most important tools to succeed in business Proper bookkeeping provides the basic information needed to determine the business's profit or loss. A sound bookkeeping system is the foundation on which all the financial information can be built. Accurate bookkeeping system is the solid foundation for filing income tax return, without proper bookkeeping the business taxes are meaningless. At YAG Accounting, we have the experience, systems & resources to produce detailed bookkeeping records so that your corporate income tax is prepared accurately with a solid financial record support.

Proper financial records will help you answer very important questions, such as:

  • Are you making money, or losing it? .
  • How much?
  • Is your business on sound financial ground?
  • Is financial trouble lurking ahead?

Bookkeeping is one of the most critical tasks of any business. Without strong bookkeeping system, your business could easily crash.

Tax Compliance

  • Owning and operating a business in Canada means you have some legal responsibilities.
  • CRA requires regular reporting of Canadian sales tax, payroll taxes, and income taxes.
  • Each province and territory has their own tax related requirements as well.
  • These regulations are often referred to as government compliance requirements.
  • Tax compliance returns and payments should be filed on time.
  • Failure to report and remit by due date leads to costly penalties and interest charges

Inactive Corporations Have to File Too

  • All corporations operating in Canada have to file a T2 corporate tax return each year.
  • Even if you did absolutely nothing with your corporation all year, it still exists.
  • Until a corporation is to formally dissolve it carries on and must file tax every year.

Corporate Structure Take steps to protect your business assets

If you own assets, such as real estate that you use in your business consider separating their ownership from your business operations by placing those assets in a holding company to protect them from creditors of the business. Also, if you have excess cash in your corporation, consider paying those amounts as dividends to a holding company and then lending the funds back on a secured basis if needed in the business operations. This will give your holding company a claim on the assets of the business, protecting those assets from third parties.

Business expenses……General Rule

Claim any reasonable current expense you paid to earn business income. Purchases & business expenses must be substantiated with a sale invoice, agreement of purchase and sale, a receipt, or some other voucher that supports the expenditure.

Salary or Dividends? How Do I Pay Myself? Employment Insurance (EI)

  • Employment Insurance (EI) premiums can constitute a considerable expense.
  • There are various exemptions from having to remit EI premiums.
  • For example, if you own more than 40% of the voting shares of a corporation, your employment is not subject to EI premiums.

Pay salaries to family members

If a family member has provided services to your business, consider paying them reasonable salaries or bonuses before year-end if they will pay less tax than you or your business. So, your business can claim a deduction and there may be little or no tax owing by your family member. This strategy will also provide income to your family member to create RRSP contribution room, allow for child care deductions, and make contributions to the Canada Pension Plan if the hope is to collect CPP later.

Director's fees

If your spouse and/or other family members are directors of your corporation, consider paying them a director's fee for services performed. Such services usually include attending directors¡¯ meetings, directing the management and affairs of the business, approving financial statements, declaring dividends, etc.

When salaries are considered reasonable?

As a rule, salaries are considered reasonable if they are representative of an amount that would be paid to an arm¡¯s-length party for similar services, in other words, comparable to what you would pay an unrelated employee to do the same job.

Time the purchase & sale of capital assets

If purchasing capital assets, consider doing so, & putting those assets to use, before your business year-end to begin claiming capital cost allowance (CCA) sooner. If selling capital assets, consider delaying the sale until after year-end to claim CCA for one additional year.

Capital Cost Allowance (CCA) - Depreciation Expense

CCA is the tax deduction for depreciable property such as furniture, equipment or even buildings.

The cost is deducted over a period of years, through a CCA claim.You don't have to claim CCA in the year that it occurs – as tax strategy you can use CCA to reduce your income tax. The CCA is not a mandatory tax deduction so you can use as much or as little of your CCA claim in a particular tax year as you wish; you can carry any unused portion forward to help offset a larger income tax bill in the future.

It doesn't make sense for you to take your full CCA claim deduction in a year that you have little or no taxable income.

Business-use-of-home - for Self-employed

Generally, you can deduct expenses for the business use of a work space in your home as long as:

  • The work space is your principal place of business; or
  • you use the space only to earn your business income & you use it on a regular and ongoing basis to meet your clients, customers, or patients

Business-Use-of-Home Expenses What to deduct?

  • Mortgage interest, property taxes and/or rent,
  • Heat
  • Lights
  • Water
  • Maintenance
  • Cleaning materials
  • Telephone
  • Internet connection

Claim depreciation on the portion of your home

In general, it¡¯s not a good idea to claim depreciation on the portion of your home used for business purposes, since there may be negative tax implications if you ever sell your home. If you do not claim depreciation, your entire house may be regarded as your principal residence and any gain realized on its eventual sale may be tax-free.

Income Tax Installments

Corporations are required to make instalments if the total tax liability for the current and preceding taxation year is $3,000 or more. CRA will charge non-deductible interest on the underpayments.

Manage your installment payments

You may be sending too much money to the CRA. If your income is falling and you're making installment payments based on last year's income, there may be an opportunity to reduce those installments or perhaps even stop making them.