VAT and Its Technological Dependencies

Posted on Nov 21, 2017

VAT and Its Technological Dependencies

As the VAT implementation date is nearing, the businesses are immense pressure to set up the entire VAT enabled IT Platform for easy VAT management. In a recent survey by  Thompson Reuters & ACCA highlighted the different scenario altogether. According to the survey majority of the businesses are still not VAT ready as their IT system is yet to be updated in accordance with the proposed tax law. This has exposed and highlighted the number of shortcomings and challenges faced by businesses currently, ahead of the VAT implementation. 

From January 1, 2018, the proposed introduction of five percent VAT on most supplies of goods and services in the UAE will present a number of challenges for businesses operating in the region as the new tax will impact all parts of business. The survey by Thompson Reuters & ACCA revealed that only 29% of the businesses have VAT enabled IT system, while 18% stated that they've partially integrated their IT system in accordance with the VAT laws. Shockingly, 47% percent companies are still uncertain about the VAT integration into their existing system. 

In another survey earlier this by conducted by Hays concluded that A total of 52 percent of UAE-based businesses do not have a VAT implementation strategy in place by the January 2018 deadline. What is perhaps most surprising is that 60 percent have not assigned a budget for the change.

The survey found that the majority of organizations plan on implementing VAT without increasing headcount spend, with 61 percent introducing the new laws using their existing workforce. Of those who have set a budget, the most common is up to AED100,000 – the smallest bracket spend given in the research, and only 5 percent expect to spend more than this.

The challenge is to understand all the available options and make decisions that best support your business, invoicing and indirect tax reporting obligations. To overcome these challenges these basic guidelines has to be followed:

  1. Set up a new ERP system as a well-designed enterprise resource planning (ERP) system connects all the areas of your organization – including those related to indirect tax. 
  2. Find potential VAT risks in your company’s ERP system.
  3. Evaluate and test the VAT reporting component of your ERP system for its efficiency from VAT risk management and administrative points of view.
  4. Deploy ERP system to develop strategies that will reduce VAT costs and facilitate revenue growth.
  5. ERP framework has to be developed in accordance with the niche demands of the businesses as an ERP framework will help the company manage VAT better.

With less than two months to go, the key areas to prepare your business for the implementation of VAT are as follows:

  • Register with the FTA: currently the registration system is being piloted but is expected to be opened within a week or so.
  • Communicate with customers/suppliers: the impact that VAT will have on your goods and services;
  • Training: invest in and obtain comprehensive VAT awareness training which should be provided to key staff on the VAT legislation. VAT will impact on all sections of a business including finance, IT, human resources, procurement, legal, sales, and marketing. All transactions will have a VAT implication and adequate planning and training is required to ensure compliance and avoid fines;
  • Contracts: steps should be taken to identify contracts that may need to be modified following VAT implementation. For example, checking whether existing contracts are exclusive or inclusive of VAT (if the contract is silent, VAT will be deemed to be included). Amendments to existing contracts may be required and businesses should consider including a clause into supply contracts which states that payment will not become due until a valid tax invoice has been issued;
  • VAT Records: the GCC VAT Accords require records to be kept for a minimum period of 5 years. Further clarification around this is expected in the Implementing Regulations but business should ensure that by 1 January they have implemented internal record-keeping systems in relation to invoicing, imports/exports and other relevant documents to be able to produce an audit trail of their business; and
  • VAT Returns: businesses should take steps to confirm that financial and point of sale systems and software are able to process VAT calculations and produce compliant VAT receipts.

The transition to a VAT will likely require significant resources and it is recommended that businesses start planning now for the introduction of VAT, as the expected changes required to comply with the tax will require significant lead time to design and implement.

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