Predicting outcome of VAT is a hit and miss affair

Many businesses in the UAE are in a quandary, unable to absorb the VAT cost themselves, but nervous of trying to pass it on to consumers

Former U.S. Secretary of State and 2016 Democratic presidential nominee Hillary Clinton takes the stage during the LA Promise Fund's Girls Build Leadership summit in Los Angeles, California, U.S., December 15, 2017. REUTERS/Mario Anzuoni     TPX IMAGES OF THE DAY
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The UK will vote to remain in the EU, Hillary Clinton will be elected the US president and both Theresa May and Angela Merkel will be strengthened after national elections.

These are just a few examples of the predictions I’ve made in the past couple of years that have proved to be spectacularly wrong. So it with some trepidation that I look ahead to the coming weeks and months and try to take an informed guess at how the introduction of VAT will play out in the UAE.

In the first few weeks, I expect there to be a degree of panic as a number of businesses realise that they should have registered for VAT, but haven’t done so. Honestly, they have no excuse. They’ll be hit with penalties. They should be. Failure to register for and charge VAT puts unnecessary pressure on the functioning of the system.

There will be an immediate focus on prices and price increases. Many businesses in the UAE are in a quandary, unable to absorb the VAT cost themselves, but nervous of trying to pass it on to consumers and business customers otherwise unable to recover VAT in full, such as banks and funds. I still expect a number of businesses that are able to recover VAT in full to argue that their suppliers should absorb the VAT, notwithstanding that this would mean a price cut for the supplier, and that the legislation provides that in most cases the price should be treated as VAT exclusive.

There will be a number of cases where a recipient is not being charged VAT by its supplier in circumstances where the recipient thinks that it should be. Although the recipient is not generally required to “police” the VAT compliance of the supplier, this does give rise to some difficult decisions. Should the recipient, particularly one that is able to recover VAT, demand that the supplier charges VAT? Seems a strange request. But addressing up front ensures that the recipient receives a VAT invoice in a timely manner, that it will not receive a later demand for the additional VAT, and that its supplier can focus on supplying rather than being hit with penalties for non-compliance. On the other hand, the consumer or business that it is unable to recover its VAT in full may decide to keep quiet and hope no one notices.

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Looking to the first quarter of 2018, I expect businesses to start grappling with some of the more challenging aspects of VAT. Should this mixed supply be standard rated or zero rated, or should the price be apportioned between the supplies? Can I zero rate this export? Is this sale of assets subject to 5 per cent VAT or is it a sale of a business which shouldn’t be treated as a supply at all? Who - on reflection - actually is my customer and where do they belong for VAT purposes?

Businesses are also likely to become more proactive in looking to reduce the overall VAT cost in their structures and transactions. This is less likely than to manifest itself in aggressive tax planning, than an attempt to avoid double taxation or minimise lengthy periods before VAT can be recovered. It will be well worth doing.

Looking towards the end of 2018, I expect some businesses to be recoiling from the extensive penalties that are imposed on them, while wrestling with making the necessary subtle changes in their systems as the remaining GCC countries begin to introduce VAT (hopefully all on the same day). I expect a few businesses to go bust, citing VAT, although it’s unlikely it will finish off any fundamentally strong firms. The FTA might start to get more interested in the informal economy, and actively enquire into “cash in hand” businesses.

The end of 2018 will also be the time I expect the spectre of litigation to arise. Litigation between commercial parties is likely, not least because a number of businesses will fail to make the necessary notifications to their customers to ensure that in appropriate circumstances the consideration can be treated as VAT exclusive - a large number of the communications I’ve seen are technically ineffective under the legislation - and will be scrabbling around for arguments that the contract allows them to. But also around this time I would expect to be threatened by the FTA against taxpayers, and by taxpayers against the FTA. My expectation is that positions will be taken by the FTA in relation to VAT that will be in some cases, capable of challenge and, in others, simply wrong. Don’t accept an incorrect VAT assessment.

But let me not be too pessimistic. Most businesses most of the time will be able to operate VAT without too much bother. Consumers will grumble, but in most cases the price increases are likely to be relatively small and one-off unless the VAT rate is increased.

In respect of which, a final prediction. By 2023, the rate of VAT will be higher than 5 per cent. Much higher.

Merry Christmas.

Jeremy Cape is a tax lawyer at Squire Patton Boggs, which has offices in London, Dubai and Abu Dhabi. Follow him on Twitter @jeremydcape