VAT accounting is one crucial functions of any business operating in the UAE, as it defines the company’s compliance with VAT tax laws of the UAE.Value Added Tax (VAT) is a consumption type of tax which is charged on the supply of goods and services; it is an indirect type of tax which must be borne by the final consumer. Value Added Tax is another tax mechanism which is accepted and implemented by more than one hundred and forty five countries in this world.
Different Forms & Types of VAT:-
From a business perspective, there are now two forms of VAT: one that is receivable and another that is payable. The VAT collected from sales needs to be sent to the government, but the VAT paid on purchases can be claimed back from the government.”. On the other hand, the VAT paid whilst purchases can be obtained from the government.The following are VAT types:-
- Input VAT:- There is the input VAT that is levied on the purchase of any goods or delivery of any services: the buyer, in this case, is able to recover the said amount from his/her settlement if he/she is registered with the authorities that deal with VAT taxes.
- Output VAT:- The output VAT can be computed directly on the supply of goods and services on sale.VAT accounting involves determining how much VAT a business needs to remit, along with addressing other VAT-related questions relevant to the business operations.
VAT Accounting Record:-
Under UAE Tax Law any taxable person needs to preserve a record for at least the earlier five years of business. The accounting records should be detailed to the extent that every piece of business information can be derived from them as and when it is needed. It also assists in determining the level of consumption tax payable, assists in reducing the tax liability and the keeping of such records is now compulsory at an international level.
Fine and penalties for violations:-
Fine/penalty will be imposed in case of failure to maintain accurate accounts as a bookkeeper.
- On first time violation, the individual or business who fails to maintain proper records will be fined a penalty of AED 10,000.
- The second time the offense is committed, then a fine of AED 50,000 should be met.
VAT Accounting in UAE
In line with the regional understanding of the implementation of the VAT, the UAE is one of the GCC countries that has in principle endorsed the idea.
Unified VAT Agreement (UVAT)
Main points of this document are given below:-
- The UAE, as a member of the GCC, has embraced the principle of implementing VAT.
- The GCC countries are bound by the Unified VAT Agreement (UVAT) which provides direction to the jurisdiction for VAT implementation.
- This decision not only aligns with regional agreements but also helps diversify the country's reliance on oil and hydrocarbon revenues by exploring other sectors.
- This led to the development of the VAT Accounting in UAE and the former is also referenced to another source of the latter.
- The standard VAT rate in the UAE has been set at 5%, effective from January 1, 2018.
Classification of UAE VAT:-
The VAT system in the UAE is categorized into three distinct rates.
- Standard Rate:- Treat has also levied on almost all the goods and services this year at the standard tax rate of 5%. These are electronics, automobiles, fuel, jewelries, foods & beverages, garments, films & leisure, cosmetics, restaurants & hotels, space & property leasing & building & construction.
- Zero Rate:-For some categories of goods and services, VAT is charged at zero rates, this simply means that while such goods are considered to be subjected to VAT, their rate is zero. This category covers exports of goods and services, international transportation of both goods and passengers, provision of specific types of transportation, supply or import of investment-grade precious metals with a purity of 99% or more, residential buildings for charitable use, educational services, and particular healthcare services.
- Exempt:- That is so because the government of the Republic of Iraq excludes this category of goods and services from the application of the VAT law. It comprises financial products, selected dwellings, land and undeveloped lots, and local roadway transportation.
VAT Registration in UAE
VAT registration is compulsory for any business whose total supply, which is for consideration, and import value is more than AED 375,000. As with voluntary registration, this is also possible if the amount is over AED 187,500. Every legal person receives a Tax Registration Number (TRN) which is allocated 15 figures.
Documents required for VAT for accounting purposes
VAT Accounting requires the submission of a set of documents by any business that intends to embark on the program. The set of essential documents includes:
- Account of all the supplies and imports of all kinds of merchandise
- All tax invoices
- Reports of exported goods
- Taxes due on taxable supplies:-All supplies which are acquired or made by the taxable person for his business are subject to tax.
- The Federal Tax Authority (FTA) might also require information such as Annual Accounts, General Ledgers, VAT Ledgers, Purchase daybooks, issued invoices, and Credit and Debit notes.
What are the Benefits of VAT Accounting?
VAT Accounting is necessary for record keeping ,following are the benefits of Vat Accounting:-
- Easy Tax Returns:-By doing VAT accounting, the company will find itself in a position where all the documents for tax filing are collected in one place and this will simplify the exercise of preparing and submitting the tax return of the company.
- Offers Flexibility If a company plans to expand, VAT accounting can provide an estimate of the tax amount that will need to be paid. At the end of the year or at any time the management of the company can look at the VAT accounting report and depending on the amount that has been set in the budgetary provision it can decide and expand the business.
- Tracks of VAT records:-Till the implementation of VAT accounting, corporate and the concerned authorities were unable to verify if all the tax papers were submitted or not. The latter performs the function of a checklist that includes the names of the materials to be filled and submitted in the proper style.
- Lowers the Risk of Tax Audit:-By utilizing VAT accounting services from tax consultants, businesses will have comprehensive data on all transactions. This reduces the likelihood of a tax audit being conducted by the authorities, as accurate and detailed records are maintained.
- Acts as Evidence:- If the authorities decide to conduct a tax audit, VAT accounting managed by tax consultants will enable the business to present accurate transaction details related to tax, ensuring compliance and transparency.
- Reduces the Risk of Penalties:-With VAT accounting handled by professional tax consultants, businesses are ensured compliance with all rules and regulations set by the authorities, thereby minimizing the risk of penalties. The consultants also keep VAT procedures updated over time.
- Creates Awareness for VAT-Related Schemes:/Tax consultants specializing in VAT accounting keep businesses informed about new government schemes related to VAT.
- Boosts National Revenue Growth:-VAT is crucial for a country’s revenue. Proper VAT accounting, facilitated by tax consultants, ensures accurate tax payments by businesses, preventing negative impacts on the national economy.
Outsourcing VAT accounting services entails the following benefits to involving professional tax consultants; Simplified tax returns, lowered audit risks and penalties. VAT accounting services are not only assisting in accurate and comprehensive record keeping but also about the schemes that pertain to VAT to support the growth of businesses and importantly, the national revenue.