VAT ACCOUNTING TIPS
- VAT will be implemented on 01-01-2018, it is advisable for organizations not to bet on an implementation delay.
- The GCC countries implementing the Vat simultaneously are KSA, UAE, Qatar, Bahrain, Kuwait & Oman. Since it seems that only the UAE and KSA will be the early implementors of the VAT as at 01-01-2018.
- VAT rate is 5% for the time being as there is no guarantee that there would be a rate increase or a different kind of tax later on.
- It is mandatory for businesses to register for VAT if their taxable supplies (Turnover) and/ or imports exceed the mandatory registration threshold of AED 375,000. Furthermore, a business may choose to register for VAT voluntarily if their supplies and imports are less than the mandatory registration threshold, but exceed the voluntary registration threshold of AED 187,500. Similarly, a business may register voluntarily if their expenses exceed the voluntary registration threshold. This latter opportunity to register voluntarily is designed to enable start-up businesses with no turnover to register for VAT.
- In the UAE, the tax legislation is being implemented by the Federal Tax Authority (FTA) www.tax.gov.ae.
- FREE ZONES: articles 50,51 and 52 of the Decree-law 8 state that Designated Zones are to be considered as out of state, this may apply to FENCED free zones (example JAFZA), OPEN free zones may be treated as local companies awaiting clarifications from the soon to be released executive regulation.
- Export is zero rated VAT while Import is taxable.
- Reverse charge mechanism should be applied to any kind of import of services from a non-GCC country (that logically do not pass through the customs for clearance).
Reverse charge rule: Since it is difficult to enforce the law against the import of services or other intangibles, as it does not pass through the country’s customs. Input VAT on imported services is self-assessed by the recipient who can claim it in reverse (a reverse charge). The reverse charge mechanism moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service.
Example: Purchase of an antivirus software for AED 1,000/-, since it is an online transaction, no customs are involved. Accordingly, at the time of filing the tax returns, the company should declare that it purchased this service and notifies the authorities that the related VAT is AED 50, but since it is an input tax on the company, it will not incur any payment for the same.
Debit: the related expense account: 1,000/- AED
Debit: Input Tax account for 50/- AED
Credit Supplier Account for 1,000/- AED
Credit Output Tax account for 50/- AED
- As of now, no provision is taken to enable the tourists who purchased goods while visiting the country to reclaim the tax upon exiting the country as in Europe.
- Grouping: a grouping is a process of combining the activities of several entities into one group. Such a process will enable the group to report its tax as one entity. We expect a legislation to appear soon outlining the full process.
- As of 24/10/2017, it seems they are letting LLC to group with Free Zones if they fill the required parameters.
- In the case on an inflicted fine, the company can object the FTA decision through a specified process within 20 business days from notice date. On the other hand, FTA will have an additional 20 business days to revert. Further escalation can be opted for through the Tax Disputes Resolution Committee.
- Import: if an import is considered by the customs as being undervalued, they have the authority to charge VAT according to the fair market value. Usually, all related expense incurred to receive the taxable item i.e. CIF (Cost Insurance Freight) are to be included in the import cost and taxed accordingly.
- Always be the devil’s advocate, be in the VAT inspector shoes:
- While filing for Output tax: this is not the last stage of the filing by any means, VAT inspectors may contact you for further documents justifying your filing and may pop up at any time (within 5 years) asking for proofs that tally to the figures you disclosed and paid your tax accordingly for any given period. It is much advisable to keep a printout of all sales ledgers and proof of export if applicable. Be prepared and do not let the inspector feel that you are disorganized, which will lead to doubting your records in full. In many instances, the VAT inspection is not carried out randomly, they may have inspected one of your clients or suppliers and accordingly found your company. They also may have chosen a specified business activity and targeted all related companies.
- Reorganize your chart of accounts to accommodate the VAT:
- Have separate ledgers for the sales
- Local sales falling under normal VAT procedure
- Taxable Export Sales (GCC Sales), this ledge may become a twisty issue since some GCC state are not implementing the VAT at 1st of Jan 2018 and accordingly should be treated as non-GCC sales.
- Zero-rated export sales.
- Sales of VAT exempt products if any.
- Have a separate Master account for the VAT which can be as per the following chart:
- Have separate ledgers for the sales
|Master Account||Description||Sub-Master Account||Description||Controls|
|441||VAT Input Tax||4410||VAT on Purchases||Should be equal to 5% of the cost of sales ledge for a given period|
|4411||VAT on Capital Purchases||Should be equal to 5% of any new fixed asset acquisition for a given period|
|4412||VAT on expenses||Should be equal to 5% of the total taxable expenses for a given period|
|442||VAT Output tax||4420||VAT on sales||Should be equal to 5% of the total taxable income for a given period (including taxable export (GCC)|
|4421||VAT on advance payments received||Advance amounts received /105 x 5 (i.e. a temporary VAT collection) as if the client is paying with VAT|
Under each Sub Master Account, a detailed ledger by name should be created to each Supplier client of any other Debtor and Creditor. The reason behind that is being able to cross check in 2 ways:
- Total taxable sales x 5 % should be equal to the total of Sub-master A/C 4410, the same goes to all sub-master accounts as indicated above. By using any similar layout, you will easily cross-check your figures without resorting to complex excel sheets, you should immediately tackle any discrepancy as it may be a false voucher entry or something more complicated.
- By having a detailed VAT accounts by name, you can check the VAT levied on/by any specified client/ supplier without having to do any manual calculation, furthermore the simplicity if this procedure will enable the organization to answer any query raised by the authorities on a specified subject without going into multiple cross-checking.
- You will find here-below a specimen of an entry having VAT:
|Sales Entry Specimen|
|41110001||Client: Company A||105,000.00|
|44200001||VAT on Sales: Company A||5,000.00|
|70010001||Sales under VAT||100,000.00|
The double benefit of such an entry is that the Sub-Master account of the Sales under VAT (7001) multiplied by 5% should be equal to the Sub-Master of VAT on Sales (4420); Furthermore, the company can at any time check the amount of VAT levied on any given client by logging to the related auxiliary under Sub-Master (4420) as there is a possibility that the authorities will require the company to disclose the amount of VAT levied on any given client to cross-check the supplied figures.
A much complex entry will be as follows:
|Sales Entry Specimen|
|41110001||Client: Company A||Sales Invoice N° 1||10,000.00|
|44200001||VAT on Sales: Company A||Sales Invoice N° 1||476.19|
|41110002||Client: Company B||Sales Invoice N° 2||5,000.00|
|44200002||VAT on Sales: Company B||Sales Invoice N° 2||238.10|
|41110003||Client: Company C||Sales Invoice N° 3||3,000.00|
|44200003||VAT on Sales: Company C||Sales Invoice N° 3||142.86|
|41110004||Client: Company D||Sales Invoice N° 4||2,000.00|
|44200004||VAT on Sales: Company D||Sales Invoice N° 4||95.24|
|41110005||Client: Company E||Sales Invoice N° 5||6,000.00|
|44200005||VAT on Sales: Company F||Sales Invoice N° 5||285.71|
|41110006||Client: Company G||Sales Invoice N° 6||8,000.00|
|44200006||VAT on Sales: Company G||Sales Invoice N° 6||380.95|
|41110007||Client: Company H||Sales Invoice N° 7||7,000.00|
|44200007||VAT on Sales: Company H||Sales Invoice N° 7||333.33|
|41110008||Client: Company I||Sales Invoice N° 8||6,000.00|
|44200008||VAT on Sales: Company I||Sales Invoice N° 8||285.71|
|41110009||Client: Company J||Sales Invoice N° 9||8,000.00|
|44200009||VAT on Sales: Company J||Sales Invoice N° 9||380.95|
|41110010||Client K – India||Sales Invoice N° 10||9,000.00|
|70010001||Sales under VAT||Total Sales for the day||52,380.95|
|70100001||Sales – Export||Total Sales for the day||9,000.00|
You will notice in this example that we did include a sales figure falling under (export) and how usually it should be processed.
|General Expense Entry Specimen|
|63050001||Stationary||Office Square Inv#350||1,750.00|
|44120001||VAT on expenses/ Office Square||Office Square Inv#350||87.50|
|46100001||Other suppliers – Office Square||Total Sales for the day||1,837.50|
|Purchase Entry Specimen|
|60010001||Cost of Supplies||Purchase of goods Company Z Inv# 420||40,000.00|
|44120001||VAT on Purchases/ Company Z||Purchase of goods Company Z Inv# 420||2,000.00|
|40010001||Current Account Company Z||Purchase of goods Company Z Inv# 420||42,000.00|
|60010001||Cost of Supplies||Purchase of goods Company R Inv# 5007||7,000.00|
|44120002||VAT on Purchases/ Company R||Purchase of goods Company R Inv# 5007||350.00|
|40010002||Current Account Company R||Purchase of goods Company R Inv# 5007||7,350.00|
A couple of comments on the Purchase entry:
- There are 2 invoices for supplies from 2 different suppliers.
- We used 2 separate auxiliaries for the VAT under one master account.
- Upon filing the tax returns, the accountant must cross check the total amount purchased (40,000+7000) =47,000 and multiply it by 5% to get the exact amount of Input VAT which should be in our example 2,350/- and equals to the sum up of the master account of 4412 (2,000+350).
- By using this system, the company can easily calculate the input tax, and at the same time, in the case the authorities requested to know the exact amount of VAT levied on us by Company Z for example, auxiliary account 44120001 will show the amount without complications or multiple cross-checking.
- Have all your suppliers and clients VAT numbers registered on in the operating system?
- All outgoing invoices should hold the company VAT registration number.
- The Invoice should show the official client name as per his Trade License / or VAT registration.
- It should show the client complete address and phone number, the same goes to the Export.
- VAT calculation should be on an item basis and not on a full invoice basis, the problem will arise in the case the company is selling items exempt from tax.
- The VAT showing on the invoice should be in UAE Dirhams as per article 69 of the Decree-law 8, even if the issued invoice bears another currency. the conversion rate to be applied is the one published by the central bank.
- Invoice: VAT is calculated on a line basis and not on an invoice level, since some of the items sold in the said invoice may be exempt from tax. The above example shows a straightforward error due to VAT miscalculation.
- VAT process should be well clear at the invoicing level to put controls and determine who/what is taxable and what can be considered zero-rated or exempt.
- VAT declaration may be monthly or quarterly (solely depends on local legislation).
- Corporations in the UAE are expected to keep their VAT records for 5 years, whereas their Saudi counterparts should keep it 10 years.
- The FTA is in a position to request reports supporting the tax refund claims in detail, but exact types of reports are not disclosed yet. As a precaution, companies should keep a copy of their yearly accounting data, purchase and sales ledgers, invoice copies (hard or soft), as well as the clients proof of export in case products or services, are shipped overseas.
- If the Operating system cannot provide the sales breakdown by Emirate, this operation should be undertaken by the accounting software since we are assuming that the tax authorities may be requiring the company to state in which Emirate the income/service is made.
- One sequence is enough for all invoices (VAT or no VAT), but the companies Operating System should be able to easily index and reference these invoices.
- PROFORMA is not taxable but since it is widely used, some kind of legislation should be in place before VAT implementation.
- Taxable income is calculated on an accrual basis, for example, if an agreement is made by 2017 covering 3 years period, it does not mean that it is not taxable. The authorities will consider when the service is executed to apply tax and failing to accurately report the income may result in the company being liable to penalties due to tax evasion.
- Keep records of your suppliers and client’s identities since the authority may check your records at any given time.
- Keep a register of your client’s proof of export when it applies.
- Zero Rated VAT applies to the below categories:
- Exports of goods and services to outside the GCC;
- International transportation, and related supplies;
- Supplies of certain sea, air and land means of transportation (such as aircrafts and ships);
- Certain investment grade precious metals (e.g. gold, silver, of 99% purity);
- Newly constructed residential properties, that are supplied for the first time within 3 years of their construction;
- Supply of certain education services, and supply of relevant goods and services;
- Supply of certain health care services and the supply of relevant goods and services.
- Bad Debt: this is by far the most unfair circumstance that may happen to a company. In such an instance, a company invoices its client and pays the due output tax; while client declares insolvency before settling his dues. The legislation states that VAT registered businesses will be able to reduce their output tax liability by the amount of VAT that relates to the bad debt which has been written off by the VAT registered business. The legislation will include the conditions and limitations concerning the use of this relief.
- Pro rata: An issue will arise if the company is dealing with taxable supplies as well as exempt ones. Output tax is relatively easy to work with if the systems are compliant to VAT. The complication is in the company’s General Expense. Till date, all companies are accounting those said expenses in one ledge. Companies having such a case should seek the FTA’s advice in order not to fall into any problem later on. Basically, what happened in other countries is that they agree with the local authorities on a percentage base on which General expenses will be divided on a pro-rata basis.
- Proof of export: If the entity is engaged in exporting goods and services, it is crucial to keep records on how the taxable item was shipped (for 5 years), otherwise the VAT authorities may reconsider the sale as local transaction and accordingly claim the related output tax.
- Debit & Credit Notes: Special attention should be taken while issuing those notes as they will be under scrutiny from the tax authorities. If Credit Notes are linked to a taxable income, a company can reclaim the VAT calculated on the corresponding proportion within a given timeframe while sufficient proof may be required in case of inspection. Debit Notes may need to include VAT too, pending to get the final legislation.
Transition between 2017 & 2018
The transition between 2017 and 2018 may prove to be the most challenging when it comes to VAT reporting. 2017 is the last year of having complete liberty on how to record your business transactions, even if it is not according to IAS or GAAP, while this should be immediately adjusted prior to stepping into 2018.
The management should have a clear picture on how to deal with any business activity that is related to 2018, mainly the work in progress and cross year contracts. Even though the legislation is not yet very specific on such issues, common sense dictates that any business activity related to 2018 and beyond should be recorded in work in progress and not in 2017 income. Even if the invoice was issued for any given reason, the 2018 part should remain in WIP and not in the revenue ledgers.
Companies should pay attention to the overlapping agreements between 2017 and 2018. Most of the agreements made during 2017 and earlier periods did not take the VAT into consideration; hence, a special attention should be taken to allocating the income/expense on the pro rata basis and calculating the VAT on the 2018 related amount.
Invoicing the full contracts for periods crossing 2018 and registering it as a 2017 income is, in fact, a tax evasion that is punishable by law.