Do you think the VAT system is a separate world in which you aren’t familiar with the rules? Are you confused about who is charging this tax and when and how it affects your business? And what is the “added value” that is mentioned in the name of this tax at all? We are here to help and answer your question. First, let’s try to give a simple example of how it works.
VAT is a type of “general consumption tax” that is collected and paid incrementally based on the value-added at each stage of the production and sale of products and services.
Each participant in the economy “adds” some value to the service in the sales chain. The match-maker buys the material from the wood seller, processes it and sells the finished match to his buyer at a price greater than the value of the inputs of the production itself.
The difference between the value that the buyers are willing to pay the match-maker and the value of all the materials the manufacturer has acquired for the sake of production is an added value in terms of our theme today. Value-added tax seeks to tax every road user by burdening only the amount of value that someone has added to the economic chain.
The VAT is still a confusing thing for many companies, especially for new, young companies and its owners. Before starting your business, you need to know some of the basic facts that VAT brings.
- VAT is Neither a Revenue nor an Expense
The ultimate burden of VAT will be borne by the end consumer of the goods or services you provide. VAT you collect will be recorded as a liability to the FTA to be paid at the end of the month or quarter. Any VAT you pay to your suppliers for goods and services you use to create your taxable supplies will be recorded as an asset you can recover from the FTA when you file your taxes.
- In UAE you can’t charge VAT if you are not registered
You can register your business voluntarily only if you reach a minimum of 187,500 AED of Revenue, during the last 12 months, and it is mandatory to register when your sales are over 375,000 AED over a period of 12 months. You need to know your sales and watch your figures regularly, otherwise, you risk a fine for late registration (20K AED).
Charging VAT when you are not registered, is consider as fraud. And will lead to other fines. You must wait for your TRN to be able to create a “Tax invoice”.
- Payable VAT = Output VAT – Input VAT
When it comes to business, there are 3 types of VAT that you need to know about.
VAT you collect from your customers is Output VAT.
VAT you pay to your suppliers is Input VAT.
The difference between Output VAT and Input VAT is the one you pay and owe to the FTA. This difference is called Payable VAT.
- Importers and Free Zone Companies are not Exempt from VAT
Under the new tax structure, importers will have to pay VAT on top of any customs duties. Any supplies bought from abroad are treated the same as those from the local market. But there is a difference in how these are recorded in your books that affects your Payable VAT.
It’s a common misconception that companies established in Free zones don’t have to register for and charge VAT. This is not true.
While there are exceptions, the same registration requirements apply to companies in these zones.
We hope that through this article we were able to help you understand the basic concepts and understand VAT itself. If you want to learn further details, join the free VAT sessions provided by CTC Accounting team in Dubai. Link is here>>https://www.ctconsultancyuae.com/about/