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VAT in the UAE: what does it mean for UK businesses?

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Earlier this year the Ministry of Finance in the United Arab Emirates (UAE) announced the introduction of VAT. The tax-free status of the UAE has previously been a major appeal to foreign investors and individuals, but the introduction of a VAT regime will change the benefits formerly associated with that status.

UK businesses which trade in the UAE need to be aware of the changes and take steps to ensure they are not adversely affected when they come into force.

Why is VAT being introduced?

The collapse of the oil price has led to countries with economies largely based on oil production looking at ways of varying their income sources. For the UAE, it’s thought that the new tax will generate additional revenue of more than £2.5 billion in its first year alone. The new regime should also provide more stability by creating steady income for the UAE government.

What? When? Who?

The new tax will apply to most goods and services within the UAE. VAT is a fiscally neutral tax and is charged on a destination basis with the applicable rate being based on the location of the customer.

The expected rate of VAT to be introduced in the UAE is 5% for both goods and services. This is low compared to other countries: in the UK, the standard rate of VAT is 20% and rates for other European Member States vary between 17% and 27%. Despite this considerably lower rate, the UAE government believes VAT will generate significant revenue and reduce its dependency on income from oil and gas.

VAT will be charged on all goods and services supplied in the UAE at point of sale, such as cars, smart phones, electronics, jewellery, eating out and entertainment. Goods imported into the UAE may also be subject to VAT. Whilst no official guidance or publications have been released, the UAE Ministry of Finance has indicated there will be some exemptions, driven by socio-economic policy considerations. So, it is likely that basic foods will be charged at 0% and other areas, such as health care and education, will be completely exempt.

The new regime is due to start in the UAE on 1 January 2018 but it is expected that other Gulf Co-operation Countries (such as Saudi Arabia, Qatar and Bahrain) will follow by 1 January 2019. There will be a phased implementation, with larger companies being required to register in the first phase, before registration eventually becomes a requirement for all UAE businesses.

What does this mean for UK businesses trading within the UAE?

As VAT has not previously been an issue in the UAE, those supplying goods and services may be operating on contractual terms that do not include provisions relating to price adjustment where VAT is chargeable or which don’t account for the possible change in law.

The supplier is generally responsible for VAT and those contracts that are silent on it could expose businesses to potentially heavy penalties and costs. In the UAE, there have been concerns about the cost of doing business and the readiness of businesses to facilitate the introduction of VAT. For UK based suppliers, complying with the new regime should be easier given that they are already familiar with the administrative nuances of tax.

What should you do now?

UK businesses which supply goods or services to the UAE need to consider the potential impact of the new regime and keep up to date with the changes. Contracts should be reviewed to see whether they can accommodate the changes or whether new terms are needed, and internal processes should be put in place to ensure compliance. By planning now, businesses should be able to ensure a smooth transition to the new VAT regime and to mitigate any potential compliance costs.

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