As soon as your taxable supplies (excluding those outside VAT scope and exempt items) for the past twelve months have exceeded the current threshold for mandatory registration for VAT in UAE (Dh375,000 as of January 2020), your business is legally obliged to undergo UAE VAT registration.
However, the owner of a business should not and does not have to wait for the business to hit the threshold. There are those that opt to register voluntarily for the main reason that it’s beneficial. In this article, we will give you an inkling on the VAT registration process in UAE, as well as an overview of the legal obligations of business owners in the region. Let’s start!
When is a Business Owner Required to Undergo VAT Registration in UAE?
The threshold for mandatory VAT registration in UAE with the Federal Tax Authority, as of Jan 2020, is Dh375,000 as mentioned earlier. As soon as the business has registered for VAT, it is then able to apply the current VAT rate of five percent to all sales of goods and/or services.
In the United Arab Emirates, there are two ways that business owners need to be knowledgeable about when checking whether the business has already exceeded the threshold.
Historic (looking back)
Look back over your business’ taxable supplies for the past twelve months in UAE. Determine whether the total taxable sales of the business have exceeded the current threshold for registration. If it has, then it has to register for VAT as soon as possible.
Take note: A business in UAE is required to register as soon as it is eligible for mandatory registration; otherwise, the Federal Tax Authority will impose a fine or penalty of no less than Dh20,000 for failing to submit an application.
Future (looking forward)
Let’s assume you haven’t registered for VAT yet. If you know or predict that your business’ total taxable supplies for the next days or months will exceed the mandatory registration threshold, then you can start the registration process to start applying VAT to your prices. In practice, the method is used rarely as businesses in the region has a bigger total for taxable supplies over the past twelve months compared to the following thirty days. Basically, the most common method is the historic one for identifying eligibility for VAT registration.
What is voluntary VAT registration?
The voluntary registration for VAT is where the business undergoes VAT registration prior to reaching the mandatory registration threshold. If your business in UAE is already making taxable supplies of anywhere between Dh187,500 to 375,000, then it may start the registration process prior to reaching the compulsory threshold. There are many reasons as to why a business chooses to do voluntary VAT registration and they are as follows:
- The business may incur lots of costs for setting up. The VAT that has been charged on the expenses can then be processed for VAT reclaim.
- The business is selling zero-rated items in the region. The sales are charged with zero percent VAT, but through the VAT registration, VAT is able to be reclaimed for all expenses of the business.
- The business wants to provide the image of being bigger. A business that is selling items that are taxable while not providing a tax registration number (TRN) in invoices is basically shouting to the world that its annual taxable supplies amount to less than the current VAT registration threshold. This can and will put off clients from doing business with you.
- If the business is selling to other UAE businesses. A business may have customers that are VAT-registered. If so, then the VAT charged to their purchases from your business will be able reclaimed by your customers from the Federal Tax Authority.
Another key reason to why a business undergoes voluntary VAT registration is to take the opportunity in charging the flat rate of VAT as it proves to be favorable financially for the business.
How can VAT be reclaimed on purchases for the business?
As long as the business is VAT registered, it can reclaim all charges for VAT that are paid on goods or services the business has acquired from purchases. Of course, they have to be for the business.
A business cannot reclaim charges for VAT if the purchases are for private purposes or if the goods and/or services used for the business are VAT-exempt items.
In order for a business to process VAT reclaim in UAE on applicable expenses and purchases, it has to have all valid VAT invoices. If your business’ suppliers have not sent valid VAT invoices and you want to process VAT reclaim in UAE with the FTA, then you should ask for them from the suppliers.
Take note: It is not possible to claim VAT without presenting VAT invoices that are valid even when items themselves have included VAT. It is best if you consult with a regulated tax agent in Dubai to see if your invoices are valid and learn the necessary items on VAT invoices.