Implications of VAT on New Entities in UAE

VAT is a relatively new concept in UAE and hence it is imposing numerous challenges on entities. Organizations that have been functioning in UAE for quite a long time, have gradually got accustomed to the new implementation. But, that’s not the case with new entities.

A company should be able to identify whether they are eligible to register as per the mandatory threshold limit. The UAE VAT registration threshold is AED 375,000 per annum and for voluntary registration, the turnover should be about AED 187,500 per annum. In certain cases, new entities are not sure whether they should register from day one or do they need to wait for the threshold limit.

A major challenge that companies face is that customers, bankers and free zone authorities ask for TRN number even before these entities get into the registration process. Even when it comes to importing products, businesses registered under VAT will have to provide TRN to the customs department. If TRN is found valid in the system of customs department, you do not have to pay VAT. But if you are not able to provide TRN, 5% VAT will be charged.

Once you get TRN , the next step is to equip your business with correct accounting software, which is FTA accredited. The system should have the ability to automatically generate FTA Audit File, VAT return file and VAT compliant tax invoices and credit/debit notes. Identifying proper software and customizing in terms of VAT accounting will help you sort out complexities at a later stage.

If the software is FTA accredited and if it is able to produce reports as per the guidelines by the authority, then clients won’t face any issues in return filing and it will be error-free. Maintenance of proper records for a minimum period stated by FTA is equally important.

The pre-VAT era in UAE was simple in terms of banking transactions, as in there wasn’t too much scrutiny. But now, authorities such as FTA might check transaction details. If there has been a deposit or withdrawal, you should keep records of the same.

Another area that needs proper planning is VAT grouping. There will be 2 or 3 or even more companies that work as one, may be under the same owner. They can opt for VAT grouping, which will allow them to be treated as a single person for tax purposes. The benefit is that transactions between these entities will be ignored and will be tax-free. On the other hand, if you register as different entities for VAT, one company will have to pay VAT and the other one will have to claim for it. This leads to confusion and complications. Registering as one will benefit the companies in terms of cash flow and it will be easy to comply with.

If you do not meet the threshold limit, and if you stop making taxable supplies,  then you will have to apply for de-registration within 20 days. Failure to submit a deregistration application within the timeframe specified by the tax law, will result in a penalty.

Businesses will have to pay penalties if they violate any of the tax laws.

Hence, we would recommend you comply with the VAT laws and if you face any problem, it is always recommended to seek the help of a tax agent, who can take you through the entire process.