Introduction to VAT in Dubai: A Simple Guide

If you have a business in Dubai or anywhere within the UAE, it is important to understand Value Added Tax (VAT). VAT was introduced in Dubai in 2018, and is now part of the everyday mechanics of business life, and compliance with VAT is essential to ensuring smooth operations. For businesses unsure about managing VAT, consulting an accounting firm in Dubai can provide expert guidance. Let’s break down the basics of VAT, in laymen terms.

What is VAT and How Does It Work In the UAE? 

VAT (Value Added Tax) is an indirect tax on most goods and services in place at each stage of the supply chain. The end consumer pays VAT, while businesses act as a collector of indirect tax for the government. 

Let’s use an example:

• A supplier sells products to a retailer, and charges VAT. 

• Then, the retailer sells to the customer, charging VAT. 

• The retailer tracks the VAT and pays the VAT to FTA after reducing the VAT paid to the supplier. 

Thus, transparency is achieved and VAT collected at each stage to be fair. 

Businesses may also hire a VAT consultant in Dubai to ensure proper registration, filing, and compliance with FTA requirements.

The Standard VAT Rate of 5%

The standard VAT rate in the UAE is 5%. This applies to most goods and services except for items that are zero-rated (like certain healthcare and education services) or exempt (like leasing residential property or various financial services). 

For example, if a product has a selling price of AED 1,000, the VAT charged on that product will be AED 50 (1,000 * 5%), and the customer then pays the total of AED 1,050. 

When is VAT Registration Mandatory versus Voluntary? 

Not all businesses have to register for VAT. Whether or not they have to, depends on the amount of taxable supplies the business sells or imports (the sale/import of goods and services). 

• Mandatory Registration:  If your business has more than AED 375,000 in value of taxable supplies and/or taxable supplies committed through imports during the year, your business has a mandatory requirement to register for VAT. 

• Voluntary Registration: If your business has more than AED 187,500 in taxable supplies and/or taxable supplies committed through imports during the year (but not exceeding AED 375,000), you can voluntarily choose to register. 

An option of choosing to register for VAT may work to the advantage of small businesses or any business that is just starting to expand. By registering voluntarily, businesses can reclaim VAT paid on expenses. 

Input and Output Tax: An Easy Explanation

• Output Tax: This is the VAT you receive from your customers when selling products or services. For example, if you sold a laptop for AED 2,000, you would add a 5% Vat (AED 100). Therefore, the output tax would be AED 100.

• Input Tax: This is the VAT you pay to your suppliers for goods or services you buy to run your business. For example, if you paid AED 1,000 for office furniture and AED 50 for VAT, your input tax will be AED50.

When you submit your VAT return, you would deduct input tax from your output tax. You pay any resulting Balances to the FTA.

Example:

Output Tax: AED 100 

Input Tax: AED 50

Net VAT payable: AED 50

Common Situations for VAT

Here are common situations where VAT may apply:

• Retail Sales: A shop in Dubai sells clothes to the customer.  The bill will include 5% VAT.

• Services: A marketing agency sells services for AED 20,000.  They will have to charge VAT of 5% (AED 1,000).

• Imports: A company selling goods into the UAE will charge VAT on the import.

• Zero-Rated Supplies: Certain exports and services of health care and education are charged at 0% VAT meaning there is no VAT; but input tax can be claimed back for the business.

The VAT in Dubai may feel initially cumbersome at first. However, when you familiarize yourself with the fundamentals of VAT; the mechanics of VAT, when to register, and how to distinguish between input tax and output tax; you will find that it is much easier to handle this issue for both compliance, as well as maintaining your credibility with your business.