Value Added Tax or VAT is a tax on the consumption or use of goods and services levied at each point of sale. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government. It was introduced in the UAE on the 1st of January 2018 and the rate is 5%.
Sometimes businesses are not sure about the records they should be keeping for VAT purposes. It is necessary to keep all invoices and receipts for at least five years so that in the event of an inspection by the FTA you are able to prove all the figures on the VAT returns submitted. VAT inspections can happen to all sizes and types of businesses, so it is wise to be prepared.
Many costs are not VAT taxable or can’t have the VAT recovered, and this could make it easy to make a mistake, especially for new business owners. You cannot just claim VAT back on everything and should make yourself familiar with what is allowed. For example:
- VAT on entertainment expenses is not recoverable and the basic rule is that you cannot reclaim VAT on such costs. Entertaining can include things like tickets bought for clients for sporting events, concerts or theatre for example, as well as gifts or food and drink for anyone not employed in the business.
- Normally, you can reclaim VAT for purchasing, leasing or renting a motor vehicle which is used for your business activities. However, if you or anyone in your business uses the vehicle for personal purposes, VAT is not refundable.
- VAT paid on employee-related expenses will not be recoverable by the business where the goods or services are purchased to be used by employees for no charge to them and for their personal benefit. The exception to this rule would be the cases where the employer is legally bound to provide those goods or services to the employee under any applicable UAE law or due to a contractual obligation.
When accounting for VAT, it’s important to keep in mind that it’s not an additional burden to your business. As long as you account for it properly and inform yourself about all the advantages and activities that are VAT refundable, your business can thrive in the VAT environment.