This time last year, many were sceptical about the implementation of value-added tax (VAT) in the United Arab Emirates, but on January 1, 2018, the country joined the global tax arena. The introduction of VAT was a landmark event, but what have we learnt in the first 100 days and what might we expect going forward?
It appears that for a minority, the introduction of VAT was straightforward but for many it had mixed results. Despite significant publicity around the matter, many organisations were not registered for VAT on time or were not properly prepared. This has had an impact on those who were prepared for they were then burdened with the task of educating their unprepared suppliers and customers on how to implement an adequate VAT framework.
During the first 100 days, worries included technology gremlins, customer enquiries and supplier slip-ups. Many organisations either delayed or failed to issue valid tax invoices resulting in reputational, commercial, cash-flow or administrative issues. Several failed to link all their customs certification numbers with their tax registration numbers resulting in them experiencing difficulties and delays in importing their goods.
Free zones and the new designated zones were considered the same. In fact there are distinct differences between the two from a VAT perspective. VAT transactions in free zones are treated no differently to those in the mainland, but there are special provisions and treatment of goods in designated zones. It is thus imperative to fully grasp the concepts and consequences of each.
Completion and submission of the first VAT return is a key milestone; it represents the first VAT declaration to the FTA. The largest businesses submitted their first, even second VAT returns by the end of March, whilst others will do so toward the end of April, May or June.
Many may have found the process to complete a VAT return challenging. The greatest difficulty encountered so far is to ensure that the information included in the return is complete and accurate. Best practice would be to have a well-informed VAT manager with sufficient experience, and documented processes and controls that include segregation of duties. Not all businesses, however, will require this level of detail and so may decide to co-source or out-source their VAT reporting.
For small businesses, a good working knowledge, straightforward accounts and an understanding of Excel spreadsheets might be all they need to complete their VAT reporting.
To answer the questions pertaining to VAT compliance, it is important to understand what VAT compliance means to your business.
It is generally accepted that the first VAT return may not be representative. There are a number of reasons for this, ranging across transitional rules, invalid returns, delays, errors and misunderstanding.
The FTA has already issued some enquiries on the first VAT returns. Some organisations are thus quickly learning the importance of accurate and complete reporting and, unfortunately for some, the costly consequences of failing to comply.
In addition to an external tax advisers market, there is growing demand for in-house advisers. They are needed where the size and complexity of the business require it and are an excellent way of managing VAT compliance on a budget. The selection of the suitable individual is critical, with practical experience of managing a VAT-compliance function and a good knowledge of VAT as essential characteristics. Typically this person would have a fairly senior role, have junior support, and be answerable to the Chief Financial Officer (CFO).
Finding suitable candidates can be challenging; remember that VAT requires a detailed and specialist skill, and in order to maintain a level of knowledge, access to information and support is crucial.
Areas where substantial transactions or restructuring occur will also require VAT support, for example, the sale of a property, the purchase or sale of a business or a commercial restructure. Diligence should now include a section on VAT as well as warranties and indemnities. Imagine restructuring your business only to discover you created your own VAT cost, or failing to ask for VAT diligence and finding a hole in your finances!
Looking forward to the next few months, we can expect more VAT enquiries and audits from the FTA. Arranging a VAT review or a post implementation health check would be a wise investment. Finding any discrepancy and having the opportunity to correct it voluntarily can save thousands of dirhams in penalties.
Additionally, businesses should start to consider implementation of VAT across the rest of the Gulf Cooperation Council (GCC) region. Anyone supplying and/or receiving goods or services from other member states will be required to identify these transactions and report them correctly for VAT purposes.
A new industry has been formed but the quality of advice and reputation of many is still to be established. It is likely mistakes will be made; the difference will be how these are managed and reported. Investing in a post-implementation review and selecting and working with the right VAT partner will help set out on the right path to VAT adoption.
Clare McColl is partner and head of VAT of KPMG in the Lower Gulf region.