Abu Dhabi, UAEFriday 20 September 2019

VAT q&a: 'Should companies de-register if they make less than Dh375,000?'

This Dubai reader saw social media posts warning of penalties for companies that fail to de-register

VAT de-registration is where a company cancels its existing registration with the Federal Tax Authority. Silvia Razgova / The National
VAT de-registration is where a company cancels its existing registration with the Federal Tax Authority. Silvia Razgova / The National

I recently saw emails and social media posts saying that companies not making sales over Dh375,000 must de-register from VAT immediately or face penalties from the FTA. Is this correct? JK Dubai

VAT de-registration is where a registered taxable person cancels their existing VAT registration. They then no longer charge tax on their sales and cannot claim any input VAT recovery. The Federal Tax Authority legislation sets out rules for both mandatory and permissible de-registration.

You must de-register if your business stops making taxable supplies entirely, or if the total value of these supplies in the preceding 12 months is less than the voluntary registration limit of Dh187,500.

Remember, your taxable supplies include not only sales on which you charge 5 per cent VAT but also export sales charged at 0 per cent and purchases on which you are required to account for VAT under the reverse charge mechanism. If you meet these criteria, then you should de-register within 20 business days.

You may also de-register voluntarily if you are still making taxable supplies but the value of these in the previous 12 months was less than the mandatory registration threshold of Dh375,000. You cannot voluntarily de-register until 12 months after you first registered – if you registered voluntarily.

Once you de-register, you can no longer claim VAT back on your inputs and if your business grows and you meet the mandatory registration threshold, you will have to re-register. If the total of your business’s taxable supplies falls between the mandatory and voluntary registration threshold, then consider de-registering carefully, as it might be disadvantageous to do so.

A drop in taxable sales, which you believe to be temporary should not make you hastily de-register. Many companies are still wary of dealing with non-VAT registered companies and this is why many small businesses register voluntarily even though they fall below the mandatory threshold.

De-registration itself is reasonably straightforward. Simply follow the link on your FTA dashboard, stating the reason you wish to leave. The FTA will review your request before your de-registration is approved. Finally, you must submit a final VAT return and pay all outstanding dues and penalties, if any.

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I just launched my company as an IT consultant. I have clients in the UAE and overseas. Should I include the 5 per cent VAT on invoices for the overseas clients even if they won't be able to reclaim it? PA Dubai

When determining what rate of VAT you should charge, you first need to determine what is known in VAT legislation as the “Place of Supply”. The basic rule, as per Article 29 of the Decree Law, is that the place of supply of services is the supplier's residence.

This is then complicated by a number of special cases relating to the nature of the supply and customer's base. One of these special cases covers electronic services, which I assume from the information you have provided is pertinent to your business as an IT consultant.

Electronic services are defined as those delivered over the internet or an electronic network. Examples include an electronic marketplace, supply of domain names, web-hosting, remote maintenance of programs and equipment plus the supply and updating of software.

For these, and similar types of services, the place of supply is where the service was used. Therefore, if your customers are based outside the UAE, and using your services outside the Emirates, then you invoice them with VAT at 0 per cent, as an export of your services

For clients located within the GCC, who are VAT-registered in their country, you can invoice them as an export of service with 0 per cent applied, but this will change. Once the GCC link their VAT systems, these services will be VATable in the GCC state of your customer. Therefore, instead of raising an invoice with 0 per cent VAT, the transaction will be VATable in the other GCC state and outside the scope of UAE VAT. The customer will then need to account for VAT under the reverse charge mechanism.

Lisa Martin, a chartered accountant with more than 20 years' commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to pf@thenational.ae

Updated: January 23, 2019 03:02 PM

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