Operating System (OS) readiness
As a matter of fact, most of “out of the shelves” OS’s are VAT ready. This does not mean that business organizations must leave it till the last moment to position themselves and implement changes required to abide by the new law. Many parameters should be taken into consideration, here a list to name a few:
- The dependence on a third party to implement the VAT changes on the systems: Contracting a third party to undertake the implementation of the VAT process may minimize the risk of error. Such parties commonly have extensive knowledge in the systems but changes and testing may take a lot of time, since out of shelve software is designed as one fits all and is usually not business sector specific. It means that the third party must undertake changes in many other companies that will greatly affect delivery deadlines.
- Since out of the shelve software(s) are most probably developed in a different country, it may not be tailored for the UAE purposes since other countries are habituated differently to VAT and tax notions. Out of the shelve software will work best if users find the right approach to make them fit local laws.
- Ensure that output documents from your systems contain the proper information stipulated by the new law, namely the VAT number or any other information required.
With regards to in-house software, a thorough study of all the VAT aspects should be made prior to undertaking any changes. Some basic information should be gathered to point out which areas of the software should be changed and adapted. It all starts with deciding the area of business or activity the company is in, i.e. whether it supplies goods and/or services since both sectors have different approaches in matters related to recording the VAT entries and operations.
As for services, OS is relatively less complex than that in the tangible goods sector, since it does not follow any stock-keeping or warehousing procedures. However, at the same time, it may be a source of mistrust for the VAT authorities upon inspection. The reason behind that is that intangible assets can be easily manipulated whether it is an import, local purchase/sale or export; and could be a straightforward way towards tax fraud and evasion. OS for goods can be harder to work with due to the magnitude of details involved.
Starting with the purchase of the raw material, local manufacturing and/or processing up until the offering of the final product, a special attention should be given to the details of the product in question in order to record the process accurately and to determine the VAT incurred at each level. The raw material purchased and on which VAT was levied by the supplier can be claimed back.
Complications will arise if any of the company’s business activity is exempt from VAT. The issue is in the input VAT and which activity (or part of it) falls under the sellable item that is exempt. Usually, an agreed upon (between the company and the authorities) pro rata system of the company’s expenses should be in place upon submission of the tax returns.
Furthermore, a recent update by the Ministry of Finance stated that registered companies must declare from which emirate they do collect the Output tax from; this will create an additional challenge of the company’s operating system.
Thus, summing what has been mentioned so far, it is understood that most of the burden would probably be in the accounting software. Nevertheless, since most of the VAT process starts at the import level and ends and the sale of the taxable supply, the company has to draw a flow chart in order to determine the levels of which the OS has to be altered, in order to avoid facing the complex operation of reworking the VAT manually.