The UAE has now published its VAT law, Federal Decree-Law No. 8 of 2017, confirming that Value Added Tax will apply from 1 January 2018 at a standard rate of 5%. For a country that has never had a broad consumption tax, this is a significant change, and businesses have only a few months to prepare.
How VAT works
VAT is charged at each stage of the supply chain. A registered business adds VAT to its sales (output tax) and can generally recover the VAT it pays on its purchases (input tax). It pays the difference to the Federal Tax Authority. The final cost is borne by the consumer, but every business in the chain has to collect, record and report it correctly.
Who must register
- Registration is mandatory for businesses whose taxable supplies and imports exceed AED 375,000 a year.
- Businesses above AED 187,500 may register voluntarily, which can make sense if they have significant input tax to recover.
Not everything is taxed at 5%
Some supplies will be zero-rated, meaning VAT is charged at 0% but input tax can still be recovered. These include exports of goods and services outside the GCC, international transport, and certain education and healthcare services.
Other supplies will be exempt, meaning no VAT is charged and related input tax generally cannot be recovered. These include certain financial services, residential property after its first supply, bare land and local passenger transport.
The difference matters: getting the classification wrong affects both your prices and how much VAT you can recover.
What to do now
- Estimate your taxable turnover to confirm whether, and when, you must register.
- Review your pricing and contracts. Will your prices include VAT? Do long-term contracts allow you to add it?
- Check your accounting system. It needs to produce compliant tax invoices and track output and input tax.
- Train your team. Sales, purchasing and finance staff will all handle VAT in their daily work.
- Plan your cash flow. VAT returns will be due shortly after each tax period ends, regardless of when your customers pay you.
The months before January will pass quickly. Businesses that prepare now will find the transition far smoother than those that wait. We are already helping clients through this process, and are happy to talk you through what it means for your business.
This article is general information based on the rules as we understand them at the date of publication. It is not advice on your circumstances. Laws and practice change, so please speak to us before acting on it.
