Impact of VAT on Businesses – Everything You Should Know

Value Added Tax (VAT) is an important component of the UAE’s economic landscape and holds significant relevance for businesses in many ways. Understanding the impact of VAT on businesses is important for compliance, growth and optimization of tax position.

The UAE is a highly business-friendly nation that welcomes investors and entrepreneurs with open arms. Its welcoming nature and extensive government support make it a top choice for many. One key factor that sets it apart from other nations is its beneficial taxation laws and policies for companies.

This blog is dedicated to helping you understand the intricacies of VAT in the UAE, VAT impact on business and more. Let us start.

What is VAT in UAE?

Value Added Tax (VAT) is an indirect tax in the UAE, imposed on the trading of most products and services. It is applied at each stage of the supply chain that a product goes through, such as the manufacturer, wholesaler, retailer and finally, the consumer.

Though VAT is imposed and collected at each stage, the actual tax burden is borne by the ultimate consumer of the product or service. In other words, businesses are responsible for collecting and paying the tax on goods as representatives of the government, while the end consumer ultimately bears the cost.

What is VAT rate in UAE?

The standard VAT rate in the UAE is 5%. By collecting VAT, the government gains a source of income, which they, in turn, can invest in the improvement and upgrading of public services.

Who needs to register for VAT in UAE?

Businesses need to register for VAT in the UAE, but not all of them are required to do so. There is an income threshold that businesses must exceed to be legally obliged to register for VAT in the UAE:

• Mandatory registration: Businesses whose annual taxable income exceeds AED 375,000 must mandatorily register for VAT in the UAE. Failure to do so may result in legal actions and fines.
• Voluntary registration: If a business’s annual taxable income is more than AED 187,500 but less than AED 375,000, they can choose to register for VAT in the UAE. Again, they are not legally obligated to do so.

UAE VAT filing with FTA

Business must submit their VAT returns periodically to the FTA, UAE tax authority, in which they must clearly mention about the taxable supplies, VAT collected or VAT paid during that taxable period.

Here is the impact of VAT on businesses during filing VAT returns:

• If it is found that business has received more and paid less VAT on taxable supplies, the difference amount needs to be paid to the government.
• In case, business has paid more VAT and received less on taxable supplies, then difference amount can be recovered back from the FTA.

Impact of VAT on businesses in UAE

There are many ways in which VAT can have impact on businesses, especially for those who are legally obliged to register for it. Here are some of them:

Impact on cash flow:

All VAT-registered businesses in the UAE must file their returns regularly with the FTA and pay any VAT due without delay, even if they have not yet received full payment from their customers. This can impact working capital and create a cash flow strain for businesses. That is why proper tax management is always essential.

Impact on pricing:

There is impact of VAT on businesses with respect to their pricing and profits. Businesses need to set prices such that they are able to cover the VAT cost while still remaining attractive and competitive in the market.

In price-sensitive markets, businesses may even have to absorb the VAT cost to avoid impacting their consumer base, thereby reducing their profit margins.

Impact on competitiveness:

The competitiveness of an industry and the firms operating within it can be significantly affected by VAT. Businesses must manage VAT strategically and pass it to consumers by adjusting their prices. If they are unable to adjust prices and competitors offer better pricing, a business’s competitiveness can be severely impacted.

Scope of input VAT recovery:

A major benefit of VAT registration is that businesses can claim refunds on input VAT paid for qualifying business expenses. This means if a business has paid more VAT than it has collected, the difference can be recovered, helping improve cash flow by reducing overall tax liabilities.

However, to claim refunds, businesses must provide relevant records and documentation. Otherwise, the claim may be denied.

Compliance and administrative burden:

For businesses that exceed the income threshold, VAT registration becomes a legal necessity, and with that comes greater responsibility. Calculating proper tax liabilities, maintaining records as per the law, and submitting returns on time all contribute to increased administrative work and costs.

Businesses may need to invest in accounting systems and hire additional staff to ensure compliance.

Impact on consumer behaviour:

There can be VAT impact on business’s sales and consumer behaviour. VAT is included in the pricing of products and services, and the end consumer is responsible for paying it. If prices are set too high to offset VAT, it may influence consumer purchasing decisions. Higher VAT rates can therefore reduce demand for certain goods and services.

Negligence risks:

Businesses must remain compliant with all applicable VAT laws in UAE. Failure to do so, whether due to negligence or intentional oversight, can lead to legal consequences and penalties. That may affect the business’s operations and reputation.

Zero-rated and exempted VAT categories

There is no impact of VAT on businesses that deal in exempted or zero-rated supplies.

Zero-rated supplies examples:

• Exports of goods and services outside the GCC
• Global transport and associated supplies
• New residential homes
• Some educational and ancillary goods and services
• Some healthcare services
• Certain investment precious metals

Exempted supplies examples:

• Some financial services
• Residential properties
• Transactions related to bare land
• Local passenger transport

Please refer to the official government guide or contact our tax experts in UAE for more details.

Please refer to the official government guide or contact our tax experts in UAE for more details.

Tips for managing impact of VAT on your business

The implementation of VAT may bring challenges for many businesses. The most common ones include maintaining tax invoices and records, filing VAT returns on time, and most importantly, calculating liabilities accurately.

For small businesses, particularly those with small profit margins, managing VAT while remaining profitable can be tough.

Here are some tips to strategically manage VAT impact on business:

Seek expert guidance: In a dynamic nation like the UAE, navigating VAT complexities requires the right VAT consultancy services. Experts understand the tax system and can help optimize your tax position while handling registration, filing, and ensuring you avoid penalties.

Have an efficient accounting system: Invest in robust, up-to-date accounting software that supports accurate VAT management, liabilities, invoicing, and return filing. Using software reduces the chances of human error and provides real-time insights for better decision-making.

Train staff regularly: Ensure your staff is regularly trained. They should be equipped with best industry practices and have up-to-date knowledge of current tax laws and VAT regulations in the UAE.

Manage cash flow: Optimize your cash flow by encouraging early payments from customers (e.g., by offering discounts), extending payment terms with suppliers and implementing strong cash flow forecasting techniques. This helps prevent cash shortfalls and ensures you can meet VAT obligations on time.

Be legally compliant: Always stay informed about VAT laws and regulations issued by the government. Follow FTA updates closely and consult with them if you have any uncertainties.

Update pricing strategies: Regularly reviewing your pricing is essential. This allows you to adjust for VAT efficiently or even absorb it in specific cases, helping you stay competitive in the market.

Keep accurate records: Maintain all VAT-related documents and records properly. According to UAE VAT law, businesses must retain these records for up to 5 years, including sales, purchases, invoices, and other supporting documents.

Stay 100% tax complaint with Dubiz!

It is important for any business setup in Dubai, whether small or large, to fully understand and manage the impact of VAT on businesses operation and other aspects. When done correctly, this helps in optimizing tax liabilities, ensuring legal compliance, and maintaining consistent cash flow. Essentially, for the success and overall performance of your business in the UAE, you should be cautious with taxation.

Dubiz Business Setup offers complete guidance related to corporate tax in UAE or VAT in the UAE. From registering for VAT to calculating tax liabilities, filing returns, and maintaining records, our experts handle everything with the utmost care. We offer a free tax consultation, so you can book yours to discuss your tax situation first.

📞 Call: +971 56 369 5485

💬 WhatsApp: +971563695485

📧 Email: info@dubiz.co

Frequently Asked Questions (FAQs)

1. When was VAT introduced in the UAE?

VAT was introduced in the UAE on January 1, 2018, and has been in effect since then.

2. Can I get a VAT refund in the UAE?

Yes, businesses can get VAT refunds in UAE on qualifying business expenses.

3. What are the benefits of VAT for businesses?

There are many benefits of VAT registration for businesses and the economy as a whole in the UAE. First of all, by being applied at each stage of the supply chain, it reduces the potential for tax evasion. Additionally, it allows businesses to collect VAT on goods and services legally. Businesses can also recover excess tax paid from the FTA. VAT registration also improves the professional image of a business.

4. Is VAT applicable to free zones in the UAE?

Generally, free zones are subject to the normal UAE VAT rules. However, if any free zone qualifies as a Designated Zone as defined by the VAT law, it is not considered to be within the territory of the UAE for VAT purposes. In such cases, special VAT treatment applies. Please contact our experts for more details.

5. What are the VAT services offered by Dubiz?

Dubiz Business Setup offers end-to-end VAT services in the UAE, which include VAT consultancy & advisory, VAT registration, VAT reporting, return filing & compliance.