A Good Time to Refresh VAT Knowledge and Review Systems

As an outsourced accounting provider, we process thousands of supplier bills and employee expense receipts on a monthly basis.  It is clear from the number of non-compliant bills rejected by our accounts payable team that companies across the UAE have still not got to grips properly with VAT even though we are into the third year since implementation.

There have been several FTA clarifications issued since January 2018 which may have been missed or not acted on by VAT registered companies.  As we are in unprecedented times, and many businesses have been forced to temporarily close, we thought we would- take this opportunity to refresh some of the basic requirements for FTA compliance and to touch on the clarifications issued.  Now would be a good time to perform an audit to ensure you are compliant with the VAT Law.

Sales invoices

There are two types of sales invoice allowable under the VAT Law:

·         Simple invoice

·         Detailed invoice

A simple invoice can be issued for customers who are not VAT registered or where the amount is less than 10,000 AED. 

A detailed invoice is issued when the amount is more than 10,000 AED in value.

Contents of UAE VAT Tax Invoice

1. Simple VAT Invoice

·         A simple VAT Invoice must contain the words “Tax Invoice” in a prominent place.

·         It must contain the details of the supplier. Name, Address and Tax Registration Number (VAT Number).

·         In addition to the above, it must contain, Date of issue of the tax invoice.

·         The complete description of goods supplied must be included.

·         Apart from that, the most important thing a simple VAT invoice must have is the Total Amount Payable and Total VAT Chargeable.

2. Detailed VAT Invoice

In addition to the above details that are in a simple tax invoice, a detailed VAT Invoice will consist of the following details:

·         Name, address, and TRN of the recipient.

·         A unique invoice number

·         Date of Supply, if it is different from the date of issue.

·         Price per unit, the supplied quantity/volume, rate of tax and the payable amount in AED.

·         Discount, if applicable.

·         Payable Gross value of Invoice in AED.

·         Payable Tax Amount in AED.

·         Statement relating to Reverse Charge, if applicable.

Please note for the detailed invoice the VAT per line must be shown as well as the total VAT due.

There have been several FTA Public Clarifications issued since VAT was introduced in January 2018.  We have outlined 3 of the most important in out opinion.

VAT Reclaim on Entertainment

VAT incurred on any costs which are used for a genuine business purpose, or which are incidental to a business purpose e.g. food and drink provided during a business meeting, shall be recoverable (subject to normal VAT recovery rules). However, where the hospitality provided becomes an end in itself and could be construed as the purpose for attending an event, such costs will be considered to be entertainment in nature and the VAT incurred shall not be recoverable.

Further clarification is available in FTA public clarification number VATP005

Timeframe for Recovering VAT

Recoverable input tax must be recovered in the first tax period when the two conditions below are satisfied (referring Article 55(1) of the VAT Law):

·        The taxable person has received a tax invoice; and

·         He intends to pay the consideration for the supply before the expiration of six months after the agreed date for the payment of the supply.

When the taxable person receives a tax invoice, the input tax can only be recovered in the tax period when an intention to pay is formed within a prescribed period. Some businesses have internal approval processes that must be completed before payment of an invoice.  VATP017 clarifies that the taxable person’s intention to make the payment only crystallizes when the internal invoice approval process is complete and an intention to make payment within the prescribed period is formed.

Therefore, before a taxable person can recover recoverable input tax, he must hold a tax invoice and satisfy the condition that he has formed an intention to pay within the prescribed period of time.

VATP017 also clarifies the position where the taxable person has recovered the input tax on the tax return but has failed to make the payment before the expiration of six months after the agreed date of payment.  The taxable person should reduce his input tax by the unpaid amount in the tax period that corresponds to the expiry of the six-month period.  This input tax will be recoverable once the taxable person has made the payment.

Disbursements and Reimbursements

VATP013 on disbursements and reimbursements

VATP013 discusses transactions where a person incurs expenses and then recovers these expenses from another party and sets out the criteria for determining if the recovery is a ‘disbursement’ (out of scope of VAT) or ‘reimbursement’ (within scope of VAT). These are differentiated as follows:

Disbursement: the recovery of a payment made as an agent on behalf of another person, with the supply taking place directly between the supplier and the other person.

·         Example: Company A makes a payment to a supplier on behalf of their client Company B, and then invoices Company B for the payment. The supply was made directly from the supplier to Company B, the supplier invoiced Company B, and Company B authorized Company A to make the payment on its behalf. The expenses that Company A recovers from Company B will be out of scope of VAT.

Reimbursement: the recovery of expenses incurred as a principal (i.e. the supply took place directly between the supplier and the person recovering the cost).

·         Example: Company A enters a contract with Company B to provide Company B with marketing services. Company A incurs costs in its own name while providing these services and then recovers these amounts from Company B as per the existing terms of their contract. The expenses that Company A recovers from Company B will follow the VAT treatment of the main supply.

House Keeping

We have recently been involved in FTA audits and there are some points to outline here to ensure you are FTA compliant:

·         Receipts and bills should be in the prescribed formats outlined in sections 1 and 2

·         Receipts and bills should be legible – If the TRN, VAT amounts, etc are not clear these will be disregarded for VAT reclamation and the input tax previously claimed will have to reimbursed to the FTA

The FTA allows full digital record keeping and we would suggest digitizing all your VAT records to avoid any issues in the event of an FTA audit.  Paper records fade, digital records do not!

There are several cloud accounting systems available and our personal choice is Xero.  You can also adopt Dropbox to store digital records. 

Checklist

Currently when staff perhaps have more time on their hands due to the Covid-19 crisis an internal VAT audit of systems and compliance would seem a very worthwhile exercise.  Our basic checklist for this is:

·         Ensure your accounting system sales invoice setups are compliant for producing simple and detailed tax invoices.

·         Digitize your VAT records.

·         Review all FTA Public Clarifications issued.  These are all available on the FTA website - https://www.tax.gov.ae/en/vat/guides-listing

·         Review supplier bills/receipts to ensure they are FTA compliant.  Ensure your staff understand what is and what is not compliant so they can reject any bills that do not meet the criteria outlined.

Author

Steve Armitage is the founder and Managing Partner of UBS Consultants an outsourced accounts provider based in Dubai.