How can UAE SMEs future-proof their business for VAT?

dubai - SME businesses should use the lead in time wisely to prepare for the introduction of VAT

The much-mooted introduction of VAT (value added tax) across the UAE is finally about to become a reality. Obaid Humaid Al Tayer, UAE Minister of State for Financial Affairs, announced the introduction of VAT starting from January 1, 2018.

The International Monetary Fund estimates that introducing a relatively low VAT rate (by European standards) can be expected to generate Dh12 billion from tax revenue and add approximately two per cent growth to gross domestic product (GDP). This announcement was followed by the news from Kuwait that they plan to introduce a 10 per cent tax on profits of companies. There are clear signs that the tax-free environment usually enjoyed by most Middle East business owners may soon be a thing of the past.

SME businesses should use the lead in time wisely to prepare for the introduction of VAT as it can be a complex area. Some items will be exempt, such as healthcare, education and essential food items. This readiness will take a number of forms and this article will outline some of the key areas business owners will need to take into account.

Accounting software
For many businesses, keeping accounting records is a discipline they have in place and their accounting software has been tailored to meet their existing reporting requirements. Moving forward, these businesses will have to adopt VAT calculations, meaning switching on the tax function for sales and purchases and adopting the five per cent VAT rate. A VAT control account will be set up in the balance sheet and all VAT (input and output tax) will be collected.

For those businesses without formalised accounting records, the purchase of accounting software would seem to be a necessity. Most accounting software has sales and purchase tax capabilities built in and the set-up will take place as part of the initial software installation. In both cases, the help of an accounting professional is advised to ensure the software set-up captures the information correctly from data sources or manual input.

VAT reporting
Most revenue collection services have set dates for submitting VAT returns and for payment of VAT owed. Standardised reporting is normally provided to businesses and they are expected to complete these reports in an accurate and timely manner. Failure to adhere to reporting deadlines normally results in penalties, and sometimes fines, so compliance is of paramount importance.

Most accounting software systems will have VAT reporting capability to show all input (purchase VAT) and output (sales VAT) activity for the period under review. These reports should show the net amount payable to the revenue service and should also agree with the VAT control account maintained in the balance sheet.

Cash flow management
In today's SME business environment, all sales revenue collected is available to be used by the business to pay suppliers, salaries, bonuses and sometimes dividends. Under a VAT regime, sales will have an added monetary value attached to them. These additional monies will be payable to the revenue service, so careful cash management will have to be introduced. Businesses should be careful not to use VAT monies collected to service working capital requirements. The simple introduction of a secondary bank account to collect VAT monies owed should ensure payments can be met when requested.

VAT rules and regulations
Most VAT systems have clear rules and regulations about which goods or services are applicable for sales VAT and the VAT that can be reclaimed. Having a clear understanding of these rules can potentially save the business money and ensure that penalties and fines are not incurred.

Closing thoughts
The UAE revenue service will, no doubt, provide clear and concise instructions on the new VAT system but an accounting professional should probably be consulted to ensure the rules are adopted correctly. The areas discussed in this article have only touched on some of the potential impact points from the introduction of a VAT system. I would anticipate there being a grace period for adoption but now is a good time to start thinking about how you can future-proof your business with minimum disruption.

The writer is managing partner of UAE Business Solutions. Views expressed are his own and do not reflect the newspaper's policies.