As time runs out, how VAT-ready are you?
It is important to be aware that VAT is not a direct cost to businesses
With the UAE gearing up for value added tax (VAT) implementation today, some companies are still struggling to navigate the compliance environment. Getting to VAT-readiness can be tricky and time-consuming if businesses lack the right support.
VAT in the UAE is a five per cent tax set to be imposed on the import and supply of goods and services, except for items that fall under the zero-rated or exempt categories. This new reform will require companies operating in the Gulf state to make significant changes to their technology, operations, financial management and accounting practices.
It is important to be aware that VAT is not a direct cost to businesses. Companies are essentially collecting VAT from customers on behalf of the government and depositing the tax collected back with the government. The only cost that businesses will incur is in ensuring that all their systems and procedures are VAT-compliant, and in training their employees to understand this new system of taxation.
The simplest thing that companies can do now is to ensure they have a VAT registration number and an invoicing system that is VAT-compliant. Without these essential components, companies risk not being able to run their businesses efficiently. The other systems, such as returns-filing and tax audits can be managed later.
An area impacted by VAT and often overlooked is cash flow management. Companies are required to pay VAT upon invoicing, not upon receiving cash from the customer. This will present cash flow issues if the customer fails to pay on time or if the company offers extended credit terms, as businesses cannot delay VAT payments to authorities.
Furthermore, it is unlikely that businesses have adequate and effective tax compliance processes and systems in place when they have never had to deal with taxation previously. As companies are required to file tax returns online, business management systems that can generate auditable tax returns and are flexible enough to implement any changes - rather than those that are manually generated by extracting data from spreadsheets - are the need of the hour.
Record-keeping in a VAT environment will involve the submission of tax invoices with a tax registration number (TRN) within 14 days of supply of the relevant product or service, as well as maintaining five years of records including debit and credit notes, and lists of VAT-exempt and zero-rated items - all in an auditable format. Therefore, businesses will need digital systems that can automate VAT processes such as accounting, invoicing, returns and audits.
VAT penalties will provide an added incentive for companies to prepare for compliance in an efficient manner and with minimal disruption to the business. Administrative penalties will be set at no less than Dh500 and no more than three times the amount of tax for which the penalty was levied, while tax evasion penalties can equal up to five times the relevant tax and a prison sentence.
The recently-published Executive Regulations for the Federal Decree Law No. (8) on VAT provides more details on the categories of supplies that will be taxable, VAT-exempt and zero-rated. It is clear that getting a VAT-enabled software - which not only generates tax invoices and VAT returns but is also highly configurable to manage concepts like reverse charge, capital asset scheme and recoverable taxes - is going to be the key driver of compliance and growth.
While all this might seem rather daunting, it really does not need to be. Applicable in more than 150 countries, such as the UK, India and Canada, VAT is one of the most commonly levied types of consumption tax around the world.
To make the implementation process as seamless as possible, businesses can turn to reputable business management software solutions providers who have experience in helping companies prepare for VAT. Digitalisation of records and choosing a fit-for-purpose system that streamlines record-keeping and reporting will free up time and resources to focus on other business needs.
Approach VAT-compliance from three angles: systems, processes and people. Only when your staff are adequately trained on how to operate systems and processes with full VAT-compliance will you be able to be prepared for the imminent changes.
The writer is regional technical director for the Middle East at Sage. Views expressed are his own and do not reflect the newspaper's policy.
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