While accounting and bookkeeping for VAT are similar to traditional processes overall, there’s a couple of unique considerations with VAT accounting in the UAE. Being aware of the special considerations for VAT-registered businesses can help avoid surprises on the line. Unfortunately, even well-established companies still struggle with VAT’s intricacies as their operations evolve, buying trends shift, technology is developed and tax regulations in UAE change.
Businesses, small or large, must be capable of managing chargebacks, VAT complexities, constrained cash flow, and varied fixed costs in relation to the company’s books. Mishandling or misclassifying unique variables will have serious financial consequences to a business, making them among the top priorities of business owners.
When you collect VAT from customers, you’ll have VAT liability. The VAT liability must be remitted to the government, specifically the UAE FTA or Federal Tax Authority. As a result, the collected VAT of your business falls under the category, liability.
A liability is increased with credit and decreased with debt. In order to have organized books, you need to create a VAT payable account. It will represent the VAT money that you have collected from your clients but haven’t remitted to the tax authority yet. The VAT money is what you owe to the government.
When you collect VAT from customers, you’re increasing the liability account in your books, the VAT payable account. Because you are collecting VAT, you should also increase the Cash account, which is increased with debits.
As VAT is lumped into a customer’s total amount paid, you’ll include the VAT as part of the company’s total sales revenue during accounting. To do so, the Sales Revenue account must be credited. To record the received VAT from customers, credit the Sales Revenue and VAT payable accounts, and debit the cash account. When remitting VAT to the FTA during VAT returns filing in UAE, reverse the initial journal entry. In order to do so, debit the VAT payable account then credit the Cash account. It will reduce your VAT liability.
Read also: How To Reduce VAT Penalties In UAE
When purchasing goods for business purposes and paying VAT on the goods, you’re to create a new journal entry. The VAT is an expense rather than a liability. Your total expense with a business purchase includes a VAT and the price of goods you bought for the business.
Decrease the cash account, then increase the expense account. As expenses increase with debits, you should debit the expense account then credit the cash account.
A business can get tripped up if it is selling goods and/or services on several different channels, such as the retail sales in your brick-and-mortar shops, Amazon marketplace, social media, and shopping carts on websites. If your business has several different sales channels, then you need to collect VAT from all customers and account for VAT charges regardless of the channel. VAT liability isn’t channel-specific.
There are three different VAT rates in UAE and you need to ensure that you’re charging the correct amount to customers.
The standard rate is five percent and is applicable to the majority of goods and services. The standard rate should be charged unless products and services are classified as zero-rated or VAT exempt.
Zero rates, on the other hand, apply for goods that are still taxable for VAT but the rate charged to customers is zero percent. VAT accounts should still have records of zero-rated VAT transactions and they are to be reported on the VAT return of the business.
The last VAT rate is VAT exempt wherein no tax will be due to the tax authority. his means the supply of VAT-exempt goods and services are not charged with VAT. In UAE, this includes certain financial services, the supply of bare land, residential building, and local passenger.
Read also: Outsource VAT Accounting
If you have relied on VAT software for your VAT accounting in UAE, let us review the categories of VAT-related responsibilities of your business: configure software, track and manage the VAT return filing obligations of the business, register with the tax jurisdiction, address VAT notices, and more. No VAT software will be able to manage important business tasks. A VAT software can do the tax calculations, but automating all VAT-related processes isn’t realistic. You’ll need professionals, specifically regulated tax agents in UAE, to effectively manage tax responsibilities, most especially if your business is quickly growing.
To ensure full compliance with VAT regulations in UAE, call us here in VAT Registration UAE today! Our team provides a wide range of solutions that can help your UAE business.