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5 Things You Need To Know About VAT Registration Before Starting A Company In UAE

January 20, 2022

The VAT also known as ” Value Added Tax” is a form of tax similar to sales tax which is levied on an item. This form of tax could generate a great amount of revenue for the government which can be used for the improvement of the country’s infrastructure. However, some nations do not prefer to charge a humongous amount of VAT from their traders to build better international relationships. 

In UAE, the VAT is set to 5% and this low bar of percentage value has intrigued many investors to the country. If you are one among the interested investors then here are a few things you must know before investing.

1) It Is Not Necessary For Every Company To Pay VAT

The companies that possess taxable supplies and imports which exceed 350, 000 AED per year are the only ones that need to apply for VAT registration.

For companies that have the tax value 187, 500 AED which falls under the same threshold do not have to register for vat mandatorily, but can if they want to. This registration is also applicable for companies which do not exceed the set value but might expect such implementation in any 30 days of the year. 

If not registered such a company can be subjected to fines. Hence, knowing the right time to voluntarily register or not is necessary. And if registration is done with no cause it may cost unnecessary hassle and expenses. So to be able to pay taxes on time, not be subjected to fine and check all the right boxes you may take the assistance of expert business consultants

2) All Goods And Services Are Not Subjected To VAT

VAT can not be used as a blanket charge for every business. Most goods and services are considered zero-rated or exempt from VAT, this means you won’t be paying any VAT for them and can not charge the customers for VAT either. 

A few examples of such exempted goods and services are highly valuable metals, few educational services, goods exported outside the GCC, and few health care services. Even some of the sectors are exempted from VAT which includes residential areas, passenger transports that are local and bare lands.

However, it is necessary to know that the exempted goods are completely exempted from tax. But the zero rated goods and services are still under VAT consideration but at 0%. Hence, this makes it important for you to record the items that are zero-rated although you do not have to pay any tax for them. 

And in most cases when any company provides goods or services that include both zero-rated and VAT items the process of recording gets complicated which in turn may result in overpaying or underpaying of your taxes. Hiring a VAT expert may help you get rid of all such troubles.

3) There Is No Plan To Raise The Percentage Of VAT In UAE

It might shock you to know that UAE has one of the lowest VAT percentages which is set to a standard value of 5%. Whereas, countries like France charge a whopping 20% and China charges 17%.

Despite such rates among other countries, the UAE has shown no interest in increasing the VAT rate of goods and services. If you fall in the mandatory threshold of 350,000 or voluntary threshold of 187,500 it is necessary to know when is the right time to sign up and pay your taxes. 

The government’s feasibility does not excuse one from getting away when made mistakes, hence the advance calculation of amount payable and on right time must be done.

4) A Few Free Zones Are Exempt From VAT

In most cases registering for VAT isn’t the best move. And in such a situation the VAT exempt free zones could be your answer. Depending on your consumers and the type of service you provide, charging VAT might sometimes be more of a loss to your business. 

And if you are someone who sells to businesses that are already registered for VAT and can claim back the charges that apply to them then it would make no difference for you to charge VAT. However, if you sell to SMEs or small businesses that are not registered for VAT makes everything you sell 5% more expensive to them. 

Being in such situations, you might  naturally want to exempt yourself from VAT. And the best solution in such situations is to relocate your business to a tax exempt free zone. But it might not always be the best solution for you hence taking the advice of an expert might be necessary at times.

5) It Is Not Always A Bed Of Roses

When it comes to VAT, there are chances that one will have to overpay if they make any mistakes. This in turn can also cut your working capital, reduce cash flow and threaten innovation. 

And if you fail to pay or underpay you can also be subjected to fines. If not calculated and done right the VAT landscape can be quite complicated which is why our experts at Startup Zone are here to help you and guide you through such processes smoothly.

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