It’s no longer a surprise that the GCC region will introduce the Value Added Tax (VAT) effective January 2018. The introduction of a VAT system in the UAE will not just affect consumers, it will also have a broader impact on businesses. Entrepreneurs and small and mid-size businesses will be forced to look at the suppliers for the goods and services they use to run their business, in order to determine the impact of VAT.
While the concept of tax is not new globally, for the businesses in the UAE this will have a significant impact on their business model and corporate structure, which may no longer be sustainable as a result of VAT. In general, tax is a method used by several governments to raise revenue for public services. These revenues raised are generally used to service public hospitals, schools and universities, defence and other important aspects of daily life.
VAT is a form of tax known as indirect tax. it is also referred to as a type of consumption tax that is placed on a product or service whenever value is added at a stage of production and at final sale. Different to income tax, it is based on the consumption of goods and services rather than income.
Over 150 countries have implemented VAT (or its equivalent, Goods and Services Tax), including all 29 European Union (EU) members, Canada, New Zealand, Australia, Singapore and Malaysia. A 5% VAT will be introduced across the UAE on January 1, 2018. Businesses that provide taxable goods or services, with annual revenues of more than AED375,000 will be required to register for the VAT. However, businesses with taxable supplies below AED375,000 but over AED187,500 will have the option to register.
Here are three ways for SMEs to get themselves prepared and ready for VAT in 2018:
1. Early assessment and proper planning To fully comply with VAT, SMEs may need to make some changes to their core operations, their financial management and book-keeping, their technology, and perhaps even their human resource mix (e.g., accountants and tax advisors). It is essential for SMEs to try to understand the implications of VAT now through the help of professional advisors. Once the legislation is issued, SMEs must make every effort to align their business model to government reporting and compliance requirements.
2. Proper book-keeping SMEs in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date. Businesses that meet the minimum annual turnover requirement (as evidenced by their financial records) will be required to register for VAT. Nonetheless, SMEs that do not think that they should be VAT registered should maintain their financial records in any event, in case the government needs to establish whether they should be registered or not.
3. Proper training programs Training staff on the implications of VAT is important since this a new concept for people who live and work in the UAE. Staff would need to know how to explain to customers and suppliers on the requirements of VAT and how it affects business transactions. They will also need to ensure adequate record keeping and make sure that appropriate goods and services have the VAT marked up and that the correct documentation is collected also.
The UAE Federal and Emirate governments provide citizens and residents with many different public services– including hospitals, roads, public schools, parks, waste control, and police services. These services are paid for from government budgets. VAT will thus provide our country with a new source of income, which will contribute to the continued provision of high quality public services into the future. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue.