How is VAT applied when a company has multiple trade licences?
Organisations could choose to be treated as a single party for the purposes of reporting VAT
Are you an organisation that holds many trade licences?
Some of these might be self-standing. Some may be branches. Ownership of some or all may be fractured, held in differing percentages by multiple investors, domestic and/or international, and/or among family members.
Organisations that contain multiple legal entities that share common control can elect to be treated as a single party for the purposes of reporting VAT. With no requirement to levy VAT on transactions between one another and the formulation and submission of a single periodic return to the Federal Tax Authority (FTA), this would appear to be a sensible choice.
Counter intuitively, the key is common control, not common ownership. As in many choices, VAT grouping has its positive and negative aspects.
Registering a VAT Group can be done at any time. Refusal will typically be for one of three reasons. Firstly the criteria for creation are not met and secondly if the FTA feels that its creation would lead to a material change in the value of the VAT liability. Finally, where it is suspected that the purpose is to create an avoidance vehicle.
There is the potential that the FTA might severely limit grouping when VAT launches in January 2018. Particularly restricted are likely to be the larger entities trading across multiple sectors. This would allow the collection of sufficient information to gauge individual industry metrics. Four quarters of VAT returns should allow the collection of sufficient information to gauge individual industry metrics.
Behemoths will likely be instructed to report VAT monthly, mitigating any potential loss to the government should matters run financially awry.
With effective systems in place, it should be much cheaper to manage returns centrally. Monthly reviews of each entitie's VAT position, as part of the regular month end reporting process, should add little in additional time requirements.
Unfortunately, the FTA will now view these multiple entities as a single entity, which means should they decide to audit the organisation, it’s going to be an ensemble production. The cast is likely to include a diffusion of different industries with differing average expected VAT liabilities.
Unable to measure the likelihood of compliance via average industry markers, the FTA will be naturally curious as to whether matters are in order. The scale and consequently the disruption, is likely to be magnified. Thankfully the GCC framework limits the extent of the knots you might elect to get yourself into. Group membership is limited to entities registered within the same country.
Organisations have been restructuring in these uncertain times. Grouping makes the shifting of assets and liabilities simpler as no VAT is applied to intra group invoicing. This is particularly useful where a large portion of a single entity is being divested and those elements left behind need to be reallocated within the seller’s group.
Just as elements of a company can be shifted, so too can the membership of a VAT group. Indeed, you might choose to have more than one group.
What we know from international experience is that authorities are often wary of what it sees as potential financial sleights of hand. For that reason, it is not unusual that liability is extended beyond any single entity’s period of membership of a VAT group.
Moving onto administration, the particulars of a tax invoice are many and there is a fine for failing to adhere to these. As entities within a VAT group do not charge VAT to each other, they do not face this issue. This doesn’t preclude taking all reasonable efforts to minimise errors.
Next up is cash flow, because VAT is not just about following FTA mandated treatment of your processes. Once combined, organisations may find that entities are being penalised as their VAT reporting period doesn’t align to their costs and revenues. What call does the appointed C-suiter VAT champion make when a divisional general manager demands his entity is withdrawn?
Externally, the FTA can step in and order the unwinding of specific elements or collapse your whole VAT group structure. Regarding the immediacy of such a decision, I’m not yet aware, but a reason would be given.
Let’s move on to risk. All grouped entities are jointly and severally liable for the VAT liabilities of their stablemates. I would imagine that the executives of disaffiliated entities would be held equally liable and culpable for any fraudulent activity during their tenure.
VAT must be pervasive as uncertainty will condemn it to endless legal challenges and with that uncertainty in application and a resulting knock on to government revenues. Spend as much time as I have considering the permutations and you will meet some for which there is yet no guidance. Consider the following potential benefit to forming a VAT group.
X is a supplier of exempt rated goods to Y. Grouped they would ignore VAT. Would this mean that X could now claim VAT on its inputs relating to their supply of goods to Y? Assuming so, this would additionally impact overhead inputs, which could now be claimed on a pro-rata basis measured against X’s revenue to other companies in its VAT group.
VAT is fiendishly complex. Be prepared.
David Daly is a chartered accountant (Cima) who leads a consultancy practice in the UAE
Updated: September 26, 2017 12:54 PM