VAT-check: How far has your business come?
As we near the completion of 7 months since VAT was first introduced in the UAE, it’s worth looking in the rearview mirror to assess the trends and transitions. More importantly, it is critical for businesses to chart out learnings and how they plan to move forward. For a comprehensive outlook on the subject, we reached out to trusted tax advisors – Thomas Vanhee and Ouarda el Ghannouti from Aurifer Tax Middle East Consultancy.
Already more than six months ago VAT became part of everyday reality in the UAE and KSA. The tax authorities in each country realised a momentous and unprecedented task of introducing a tax unknown in their jurisdictions. In addition, the UAE even had to constitute a new tax authority.
The past months have shown that businesses are still getting accustomed to the new regime. The tax authorities have been very helpful, providing several guidelines and other useful information, aiming to help businesses better understand the VAT implications as well as their VAT obligations. In addition, they communicated profusely through all sorts of channels. More guidance from the tax authorities is still expected on several topics.
Let’s recap: Who registered?
Small businesses are granted an exemption from registration in both countries. They only have to register for VAT when their annual turnover exceeds the threshold of 375,000 AED/SAR. A voluntary registration is however allowed when businesses exceed the threshold of 187,500 AED/SAR.
According to the UAE tax authorities, more than 275,000 companies registered for VAT purposes. In the KSA, the current number of VAT registered businesses is more than 127,000. The difference in the number between the countries can be explained by the fact that the KSA applies an additional voluntary threshold for registration.
KSA businesses with an annual turnover between SAR 375,000 and SAR 1 million are not required to register until the end of this year. The expectation is therefore that the closer we get to 2019, the more businesses will be registered for VAT in the KSA.
Here are the 5 biggest oversights
Having to cope with new legislation always requires time to get used to it, as well as to understand its impact and interpretation. The past six months were not only valuable because of all the guidelines and clarifications provided, but also because businesses were able to learn their first lessons and detect the pitfalls.
Especially in KSA (SME) companies that still have to register by the end of the year can benefit from the first experiences when implementing VAT in their businesses.
- Non-compliant tax invoices
One of the common pitfalls encountered by companies was the issuance of non-compliant tax invoices. Both KSA and the UAE require specific details to be included on the invoice. The consequences of not complying with the invoice requirements are very often underestimated by companies. The financial consequences of these mistakes are very important. Suppliers will face penalties, imposed by the tax authorities. For the UAE the amount of the penalty is AED 5,000 per invoice and for the KSA it is up to SAR 50,000 SAR.
Issuing incorrect invoices also affects the purchases, because the authorities reject the right of recovery of input tax on incorrect purchase invoices.
It is therefore very important for businesses to make sure that both their sales and purchase invoices are compliant with the VAT legislation. In the KSA, most of the violations reported until now were for the incorrect issuance of invoices (e.g. absence of a tax identification number on the invoice). Companies should be well aware of these risks.
- Wrongly deducting VAT on non-business expenses
A second pitfall concerns the determination of the recoverable input VAT amount. The recovery of input VAT is solely allowed for expenses made for business purposes. Currently, the tax authorities are performing a substantial amount of refund audits, to check whether companies have correctly deducted input VAT on expenses paid. It is therefore even more important that business analyse all types of expenses and verify the underlying business purpose. It is not always easy to prove the business purpose. This applies for instance to hotel expenses, pantry expenses or insurance provided to employee’s family members.
- Incorrect filing of VAT returns
Many VAT returns are currently filed wrongly. Businesses are making mistakes by reporting the transactions in the incorrect boxes. This is a result of applying the incorrect VAT treatment, the wrong VAT rate, incorrectly determination of the place of supply and incorrectly determining the date of supply. Many businesses are currently making voluntary disclosures with the tax authorities.
- Transitional provisions
VAT is applicable as of 1 January 2018, which means the implementation of VAT should by default only impact supplies taking place in 2018. However, also continuous supplies which started in 2017 could be subject to VAT. Conversely, it is not because a supply is invoiced in 2018 that VAT applies. A good delivered on 15 December 2017 for which an invoice is issued on 10 January 2018 is not subject to VAT.
Both the VAT legislation in UAE and KSA have clear transitional provisions. Despite this, it is still sometimes a difficult task to determine in which cases supplies are subject to VAT. As a result, suppliers and their customers are still having ongoing discussions regarding their prices and the application of VAT. Much is due to unclear contracts which do not include clear tax clauses in those agreements.
- Impact on the supply chain
VAT is collected fractionally by businesses at each stage of the supply chain, from production to distribution, and to the final sale of goods and services. The introduction of the VAT, therefore, affects the whole supply chain. In some cases, the application of VAT leads to adverse effects, requiring the supply chain process to be reviewed and maybe even to change the current flows.
There is a great deal of misunderstanding with respect to supply chains running through free zones and designated zones.
In addition, due to the fact that the customs documentation plays an increasingly important role, formalities have had to be revised.
So, what’s the final takeaway?
In short, we can conclude that business has learned lessons from the past six months, but at the same time, a lot is still evolving. We have seen that important penalties are being imposed on companies who made errors or misinterpreted the provisions. Penalties can only be avoided by being fully compliant with the VAT legislation. Taking into account all the recent developments and current pitfalls encountered by companies a post-implementation review performed by tax specialists is highly recommended at this stage. This is the only way to close the most important gaps and areas of uncertainty for companies.