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Input VAT and output VAT in the UAE What the Difference?

The concept of the Input VAT and the Output VAT became a buzzword amongst businesses of the Gulf when the UAE implemented its Value-Added Tax (VAT) regime in 2018. The terms are not only technical but they influence the main idea of the UAE VAT system because a company will be able to retain the amount of money used to purchase inputs or will merely transfer the tax to the end-consumer. Nowadays, in this post, we are going to demystify the concept of  Input VAT and Output VAT in the UAE What is the Difference? in real life examples, practical tips, and some real-life situations. It will help you determine which side of the coin VAT is and how the two sides interact, as well as be aware of what to look at in your own accounting.

The Importance of Knowing VAT

We are going to be plunging into the mechanics but first, we should establish the context. The VAT rate in UAE is a flat 5 per cent on a majority of goods and services, which is low enough to ensure that taxation on consumers is low, yet the government generates revenue. All businesses registered under the VAT include:

  1. Impose higher charge output VAT on invoices it makes.
  2. Rebate the part of the Input VAT that it paid on purchases and expenses.
  3. Periodically provide regular returns on files and keep good records.

Inaccurate recording of the Input and Output VAT may lead to fines, increased audit risk and issues with cash-flow. It is essential, therefore, whether you are a sole trader, an owner of a small-enterprise or a multinational working in the UAE.

Breaking Down the Basics

What is Output VAT?

Output VAT This is the tax that is imposed by the business on the customers when they are buying goods or offering services in the UAE. Consider it as the VAT you gather. Output VAT is determined as a percentage of the selling price (without VAT) which is 5 percent.

Example:

  • You are selling a laptop at AED 10,000 (VAT exclusion).
  • Output VAT = 10,000 × 5 % = AED 500.
  • The cost paid by the customer is AED 10,500.

What is Input VAT?

Input VAT is the tax which is actually incurred by a business in the process of acquiring goods and services which will be utilized in taxable activities. This is VAT that you are able to claim. The input tax is included in the invoice of the supplier and is refunded by full refund or even offset against your output VAT liability.

Example:

  • You purchase a business printer at AED 2,000.
  • Input VAT = 2,000 × 5 % = AED 100.
  • You are entitled to this AED100 back in your subsequent VAT return.

The difference is found at the core in one line.

Input VAT is the amount you pay when making a purchase, Output VAT is the amount you will be receiving when making a sale.
This is important since the difference between the two will either make you pay or refund the VAT payable during a given reporting period.

The Interaction of the effects of input and output VAT

The amount of VAT (Payable or Refundable) has a net value of zero. The net value of the VAT (Payable or Refundable) is zero.

Your calculation of VAT return is as follows:

Net VAT = Output VAT – Input VAT

  • Positive Net VAT → you are liable to the UAE Federal Tax Authority (FTA).
  • Negative Net VAT → you are entitled to a refund or a carry over to the next period.

Example Scenario

Category Amount VAT (5%) Total
Output 20,000 1,000 21,000
Input 15,000 750 15,750
  • Net VAT = 1,000 – 750 = AED 250 payable.

Assuming that the Input VAT were bigger, say 1,200, the calculation would lead to the refund of AED 200.

Musings of the Fallacies that Bias the Difference

  1. Confusion of VAT-inclusive and VAT-exclusive prices – It is important that before making calculations, always differentiate the base price and the tax component.
  2. Non-claiming of Input VAT on non taxable or exempt goods – Input VAT on goods used to produce taxable supplies can only be claimed.
  3. Disregard of 8 days kill time deadline to file a filing, may attract interest and penalties.
  4. No separation of business and personal expenditures – Again, personal expenses do not claim any Input VAT.

Practical Tips on Easily managing VAT

  • Use special VAT software or spreadsheet that separates automatically the Input and Output VAT.
  • Store invoices with suppliers in orderly manner – Store invoices in digital format – Label with the letters Input VAT – have receipts to be audited.
  • Keep track of your sales and expenses real-time – This eliminates the end of month surprises.
  • Check your VAT position after every quarter of a year – Identify abnormalities in good time.
  • Keep abreast with the VAT requirements – The FTA frequently amends regulations about exemptions and threshold.

Real-World Examples

1. A Retailer

Scenario: In a boutique designer clothes are being sold.

Output VAT: 5 % on all sales.
Input VAT: 5 0 per cent wholesale purchases and store rental.

Outcome: Net payment of VAT is normally minimal as the spend is a higher percentage as compared to sales.

2. A Consulting Firm

Scenario: A software consultancy company offers its services to the clients in the UAE.

Output VAT: This is levied on consulting fees.
Input VAT: This is charged on the office supplies and professional services.

Observation: Net VAT payable is in close relation with revenue due to the lower percentage of input costs as a proportion of services.

3. A Construction Company

Situation: Construction of a business center.

Output VAT: This is levied on construction contracts.
Input VAT: It is paid on materials, machinery and services of subcontractors.

Outcome: In many cases, Input VAT is more than the Output VAT and the refund would be made and could be utilized to cover future payments.

Keywords to LSI that You will Find handy

  • UAE VAT registration – Procedure of registration and compliance.
  • UAE VAT rates – The existing 5 per cent standard.
  • VAT compliance – How to remain audit-ready.
  • Goods and services VAT – Treatment differences.
  • Tax withholding – When with VAT.

Frequently Asked Questions

Question Quick Answer
Can I claim Input VAT on imported goods? Yes, provided the goods are imported and used in making taxable supplies, you can claim the Input VAT.
What happens in case I under-report Output VAT? FTA can also penalize and charge extra interest on the deficit.
Do I need to claim Input VAT on personal expenses? Personal expenses do not qualify for Input VAT recovery.

Bottom Line

Learning about and knowing about the difference between the input VAT and the output VAT in the UAE is not a mere exercise in theory. It is a reality of operating a VAT registered company in UAE daily. You can avoid paying the tax which you get on purchasing and collect the tax which you get on sales by:

  • Keep proper financial books.
  • Avoid costly penalties.
  • maximize the use of cash with prompt refunds.
  • Establish the credibility with the FTA and your clients.

Are you Ready to Tighten Your VAT Process?

You have now understood well the two sides of VAT. The second step would be to have a system that records both the Input and the Output VAT in real time and make sure they comply and are financially sound. We do not know where to begin, but how about:

  • Implementation of cloud-based accounting solution with VAT modules.
  • Utilizing a VAT specialist/ consultant to examine your processes.
  • Attending the online webinars of the FTA to keep abreast with the latest.

Get your VAT calculations under control today- your books (and your bank account) will be glad!

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