Introduction of VAT in UAE and its Impact on the UK based Businesses

Posted on Nov 21, 2017

Introduction of VAT in UAE and its Impact on the UK based Businesses

UAE is about to implement a new taxation law in the form of Value Added Tax or VAT but many nations of the west including the UK has successfully implemented and executed the law. At times reforms do not achieve their objectives successfully and sometimes even have to be reversed. With the implementation of the VAT, the UAE is the government is bullish in making the investment in the Gulf nation more lucrative and easier than earlier. Businesses in the west that trade goods and services from UAE have to be updated on the new law as it will impact their businesses directly as well. 

VAT is set to make its debut in the GCC region with effect from early 2018. The Ministry of Finance, UAE recently proposed the new law that allows them to impose a tax on all goods and services at a standard rate of 5%, and it's called Value Added Tax (VAT). According to recent surveys, the fall in the oil price has enforced the GCC nations to come up with an alternative source of their fiscal revenue. It is estimated that the UAE will generate more than Dh12 billion additional revenues in the first year after implementation of this new tax. VAT is a standard tax of 5% imposed on goods and services. The new tax will apply to most goods and services within the UAE. VAT is a fiscally neutral tax and is charged on a destination basis with the applicable rate being based on the location of the customer.

Unlike UK where the standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%) or other European Member States where VAT varies between 17% and 27%., the UAE rates are on the lower end as the proposed law to be introduced at as low as 5% standard rate. 

Companies in the UAE having annual revenues of over Dh3.75 million will be required to register under the GCC VAT system and for companies whose revenues fall between Dh1.87 million and Dh3.75 million, VAT registration will not be mandatory in the first phase. But eventually, each and every organization will be required to register under the new system.

According to economists, the introduction of the new tax system can contribute, almost $6.5 billion to the UAE's economy, thus making it more sustainable and robust and even push it to $440 billion in 2019. International Monetary Fund (IMF) even proposed that the efficient and sustained implementation of VAT can potentially generate enough revenue in the tunes of 1.5% of the existing national GDP.

The supplier is generally responsible for VAT and those contracts that are silent on it could expose businesses to potentially heavy penalties and costs. In the UAE, there have been concerns about the cost of doing business and the readiness of businesses to facilitate the introduction of VAT. For UK based suppliers, complying with the new regime should be easier given that they are already familiar with the administrative nuances of tax.

UK businesses that supply goods or services to the UAE need to keep a close eye on the latest developments in the Gulf nation and also consider the potential impact of the new reform. Contracts should be reviewed to see whether they can accommodate the changes or whether new terms are needed, and internal processes should be put in place to ensure compliance. By planning now, businesses should be able to ensure a smooth transition to the new VAT regime and to mitigate any potential compliance costs.

Needless to say, businesses will be required to restructure their operations, financial management and book-keeping, technology, and human resource mix, in order to prepare for the new tax regime. At this stage, well-planned change management and implementation would be of utmost importance to local business success in implementing VAT across all sectors. And this is where UK firms, with their VAT experience, will be much sought after in the months to come.

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