When asking the question of how VAT will impact the construction industry in the Middle East, we should consider that all businesses whether simple small retail stalls right up to multi-national corporations need to adapt and adjust to the new legislation. There will likely be changes and improvements, particularly in the early days to iron out the kinks in the process, but the following key points are fundamental to understanding what the legislative changes will mean for you.
UAE VAT – The Highlights
UAE VAT became effective 1st January 2018
The current UAE VAT rate is 5%
UAE VAT will be applied to both goods (products) and services provided
Record keeping is mandatory for at least 5 years
Failure to comply with the new regulations will incur penalties
VAT is due on the goods and services provided from countries outside the UAE
According to The Ministry of Finance:
Some Products and Services will attract VAT at 0% and be deemed ‘zero rated’
These currently include:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
- Supply of specific education services, and supply of relevant goods and services;
- Supply of specific Healthcare services, and supply of relevant goods and services.
- Some Goods and services fall outside the scope of VAT
The following categories of supplies will be exempt from VAT:
- The supply of some financial services (clarified in VAT legislation);
- Residential properties;
- undeveloped land;
- Local passenger transport
Who can or will be able to register for VAT?
All businesses are required to register for VAT if their goods and services (invoices and charges) are in excess of AED 375,000. A business may elect to register for VAT voluntarily if their goods and services already exceed AED 187,500. Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold.
What responsibilities fall upon a business in relation to VAT?
According to the FTA, all businesses in the UAE will need to record their financial transactions and ensure that their financial records are accurate and up to date.
In general terms, it is expected that a vat registered business will:
- Charge VAT on the goods and/or services they supply;
- Claim back VAT they have paid on goods or services they have received in relation to the business;
- Keep accurate business records which will allow the authorities or their representatives to check the VAT transactions (payments and reclaims)
All VAT-registered business are required to report on the amount of VAT charged and paid in line with the VAT reporting periods assigned to them. Any difference in the amount of VAT collected and paid will be rectified by either the business making up the shortfall or by a refund if the business has paid too much.
What does a construction business need to do to prepare for VAT?
With the introduction of new VAT requirements, businesses will already have adapted so should have used the opportunity to align their core operations, their financial management and book-keeping, their technology, and all elements from tender and estimation through to handover. It is essential that businesses try to understand the implications of VAT make every effort to align their business model to government reporting and compliance requirements. Understanding how VAT is collected from you even before you have collected it from your clients can be a critical difference in maintaining cash-flow.
The final responsibility and accountability to comply with this new tax law falls upon your business (regardless of whether the law itself has been tried, tested and correctly implemented).
When are registered businesses required to file VAT returns?
Taxpayers must file VAT returns with the FTA on a regular basis (quarterly or for a shorter period, should the FTA decide so) within 28 days from the end of the tax period in accordance with the procedures specified in the VAT legislation. The Tax returns shall be filed online using FTA eServices.
What kind of records are businesses required to maintain, and for how long?
Businesses are required to keep records which will enable the Federal Tax Authority to identify the details of the business activities and review transactions. The specifics regarding the documents which are required and the time period for keeping them will be clarified in the relevant legislation at a later date (but you will be fined if you fail to meet these criteria).
How long must a business retain VAT invoices?
VAT invoices issued and received must be retained for a minimum of 5 years.
Possible fines and penalties?
Penalties can be imposed for not adhering to the VAT laws and regulations. Examples of actions and omissions that may give raise to penalties include:
- Failure to register for VAT when required to do so;
- Failure to submit a tax return or make a payment within the required period;
- Failure to keep the records;
- Tax evasion (broadly speaking, this would involve a deliberate act or omission with the intention of not paying the required VAT)
Is VAT payable on import goods?
Yes, VAT is payable on goods and services purchased from abroad. Depending on whether the receiver is VAT registered, the goods may be held (not released) until the required VAT is paid or may fall under reverse charge mechanisms for off-setting (this highlights the need to have a competent and effective accounting system in place).
This article is intended to give some guidance but cannot include all avenues. It does highlight that the introduction of VAT is not necessarily as straight forward as ‘adding a bit extra on for tax’ and that businesses of all sizes are going to need to make adjustments. In the construction industry, margins are so precise, and critical to a projects profitability that errors in accounting for the VAT required and or fines for errors in reporting, will be calamitous.
Ensure that your software is set up to handle VAT and the multiple stages of payment and reporting that are now mandatory for you to follow.