1. What is Value Added Tax (VAT)?
Value Added Tax (VAT) is an indirect tax levied on the consumption of goods and services in the United Arab Emirates. It was introduced on 1 January 2018 under Federal Decree-Law No. (8) of 2017 on Value Added Tax, administered by the Federal Tax Authority (FTA). Businesses collect VAT at each stage of the supply chain and remit it to the government, while consumers ultimately bear the cost. The standard VAT rate in the UAE is 5%, applied to most goods and services. VAT plays a key role in diversifying national income sources and reducing reliance on oil revenues. Unlike income tax, VAT impacts everyday business transactions, making compliance critical for all companies operating in the UAE.
2. Conditions for Registration under VAT
All businesses meeting the required turnover thresholds must register for VAT in the UAE. Registration ensures compliance with law and prevents penalties.
Key conditions include:
- Businesses with taxable supplies and imports exceeding AED 375,000 per year must register (mandatory).
- Businesses with supplies and imports exceeding AED 187,500 per year may register voluntarily.
- Businesses expecting to cross the threshold in the next 30 days must apply for registration.
- Non-residents supplying taxable goods or services in the UAE must also register for VAT
3. Products and Services Exempt from VAT
Not all goods and services are subject to VAT. Some are exempt or zero-rated to reduce the impact on essential sectors.
Examples include:
- Residential property (first sale may be zero-rated, subsequent sales exempt).
- Rent from residential property
- Local passenger transport.
- Certain financial services (e.g., life insurance).
- Bare land transactions.
- Some education and healthcare services.
4. Computation of VAT
VAT is calculated as the difference between output tax (VAT collected on sales) and input tax (VAT paid on purchases). Businesses charge VAT on their taxable supplies and claim credit for VAT paid on eligible purchases. If output VAT exceeds input VAT, the business pays the balance to the FTA. If input VAT exceeds output VAT, the business may claim a refund.
Example – ABC General Trading LLC
- Sales revenue: AED 500,000 (VAT @ 5% = AED 25,000 collected)
- Purchases: AED 300,000 (VAT @ 5% = AED 15,000 paid)
- Net VAT payable to FTA = 25,000 – 15,000 = AED 10,000
- If purchases were higher than sales VAT, ABC could apply for a VAT refund instead of making payment.
5. Accounting Documents to be Maintained for VAT
Businesses must maintain proper accounting and tax records in compliance with the UAE VAT Law and International Financial Reporting Standards (IFRS/IFRS for SMEs). These ensure transparency, audit-readiness, and accurate tax filings.
Essential documents include:
- Tax invoices and credit notes.
- Records of all sales and purchases (domestic & imports/exports).
- VAT returns and payment records.
- Bank statements and accounting ledgers.
- Contracts and agreements related to taxable supplies.
6. Fines and Penalties under VAT
The FTA imposes strict penalties for VAT non-compliance. Some key penalties are:
- Failure to register for VAT – AED 10,000.
- Failure to file VAT return by due date – AED 1,000 for the first time, AED 2,000 for each repeat offense.
- Failure to maintain proper accounting records/documents – AED 10,000 (first offense), AED 20,000 (repeat).
- Providing incorrect or manipulated tax information – Penalty starting from AED 5,000 up to 300% of the due tax.
