New tax's introduction will have small as well as large repercussions
The invasiveness of VAT comes in many forms
General awareness of VAT has now reached dangerous levels with many specific aspects of VAT being spoken about. Some people have been collecting these nuggets, repackaging them commercially and presenting themselves to the market as VAT experts. This trickery is more akin to the wares of street magicians.
Today I’m going to share three different vignettes that shine a light on the invasiveness of VAT:
What’s in a name?
Companies cannot register for VAT without a bank account in the name of their entity, the same legal name listed on their trade license.
Attaining a personal bank account in the UAE is a walk in the park but a business account for a newly formed enterprise is not so easy. Due to regulatory requirements some banks have erected an obstacle course of requirements to discourage only the sternest of heart.
The banks demand minimum bank balances, mandatory insurance policies and track record of trading. Once the list of requirements is fulfilled, then come the challenges to the information provided. Documents approaching their expiry date and inconsistencies in signatures across multiple forms are some of the hurdles that will be faced at this stage.
Many established smaller entities will not have a bank account, having decided it was simpler to use their personal account. Given the above, this is understandable.
For newer entities with multiple partners, it will be best that this adventure is faced collectively. Forms requiring all shareholder signatures can unexpectedly materialise and unlike the opening of a personal account, where the bank will come and see you, with business accounts you are going to see them. Sometimes repeatedly.
Once all the paperwork is considered in order, you typically face a week before the information you need to register for VAT is provided.
The Federal Tax Authority (FTA) has stated that the latest date for SME registration, to allow sufficient time for processing and issuing of your VAT number, is December 4. Failing to register for VAT triggers a fine of Dh20,000.
The needs of a Ned
Non Executive Directors (Ned) in the mature market sense, are beginning to take root in the UAE and not before time. Having experienced elder perspectives on your board of directors enhances and sometimes resolves the logjams delaying decisions.
I’m currently involved in developing a network of Neds and some of these people have been surprised to hear that they might need to register for VAT. “Salaries are not subject to VAT”, they cry, “so why?”
By definition, Ned’s are not employees. They are external providers of services, trading under their trade licenses, invoicing periodically. Typically these people serve in a similar capacity in multiple entities. They might be compensated via a mix of monetary, equity or in-kind goods or services.
Monetary payment is obviously vatable - it’s a fee for a service. In kind remuneration is effectively a barter trade - again vatable. A monetary value will need to be computed, agreed with the FTA and a VAT-value only invoice raised by the Ned on the entity supported. The invoice will need to state the nature of the in-kind benefit received.
What about payment in equity? After much discussion over coffee, the consensus among us is that it will be vatable. Effectively it's a point in time quantifiable remuneration. Once a valuation has been made and presented to the FTA for approval, another issue may have raised its head.
Equity is jealously guarded and this valuation exercise could open an unwelcome discussion among shareholders regarding their soon to be diluted asset and indeed a potential review of how much a Ned might have been offered.
When is a fine not a fine?
I was recently chatting to a concerned individual about privately operated parking areas and how VAT impacts those. The parking fee would be vatable, but what about the charge for overstaying the maximum stay time?
The FTA has stated that statutory fees and government vehicular penalties would not attract VAT. Surely a fine for overstaying the maximum time for parking is no different than being fined for overstaying your government-managed parking ticket? They are both time based-
Despite a shared nature, the government penalties are statutory whereas your carpark is not. Effectively the penalty for overstaying your welcome is an additional fee, which is advertised and fixed. From January 12018 it will also have VAT on it.
This is good news for the car park, but not for the reason many will think. The VAT is not additional revenue for the car park operator, although it does present a positive cash flow boon that will ultimately be paid to the FTA as part of a periodic VAT return.
It’s good news because the car park operator will not need to divide up their inputs to take into account VAT and VAT exempt revenue streams. As these revenues would have been periodically fluid, due to varying levels of transgressions, it may have required regular contact with the FTA to agree the changing input reclaim split.
Too many facts can be downright dangerous if you don’t know how to use them, so tread carefully.
David Daly is a chartered accountant (Cima) who leads a consultancy practice in the UAE