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Abu Dhabi, UAEFriday 14 December 2018

Financial experts urge UAE businesses to prepare for VAT

Some businesses have admitted that they have yet to look at the issue.

Value-added tax will be introduced next year. But for shoppers and businesses, it doesn't have to be that confusing. Jaime Puebla / The National
Value-added tax will be introduced next year. But for shoppers and businesses, it doesn't have to be that confusing. Jaime Puebla / The National

Financial experts have warned that many businesses have an "unconscious defiance" about the introduction of VAT and will only begin taking the tax seriously when the "fines start coming through the door".

The Tax Procedures Law issued this week laid down the foundation for the planned UAE tax system, regulating the collection of taxes and defining the role of the Federal Tax Authority.

It paves the way for the collection of taxes, mainly VAT, which will be introduced at a rate of 5 per cent on January 1 next year and excise taxes, which will be brought in, in the fourth quarter of this year. The formal tax document plus executive regulations setting out exactly what will be taxable and exempt is expected in the coming months.

Some businesses admitted they have yet to look at the issue, but are aware it is looming.

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Ricky Jaiswal, 45, founder of Handy Man Guru, has run a successful repair business for four years and has 18 employees.

As a former banker, who was with Lloyds TSB for 10 years, he has kept careful records of revenue and employs an auditor every year.

But he admitted he and likely other businesses like his have done little to prepare for January 1, 2018.

"I know we are supposed to start the process at some point soon but I'm yet to educate myself about it. Like all Dubai expats I'm likely to leave everything to the last minute.

"But at the end of the day you can't ignore it. Just like Dewa bills and Salek costs, there's no possibility of not paying."

Mr Jaiswal said he was concerned about the potential prospect of hiring a company to handle his affairs.

"But the cost [of VAT] will be passed on to our customers, and look, the UAE remains a very good place to do business for us."

Kim Creutzburg is managing director of Seven Stars Hospitality Services, which has between 20 and 30 employees and installs furniture, electrics and fittings in upmarket hotel rooms. He waiting to learn whether his business will be affected by VAT or be exempt.

"I'll hold off doing anything until I know exactly if I'll be exempt or not. As a business owner you know it's coming. But I'm from Denmark so I know all about VAT," he said in reference to the country's 25 per cent rate, the joint highest alongside Norway and Sweden.

"I'm aware a law was issued just in the past few days, but what it'll mean for us isn't clear yet."

Some business owners are less aware of the implications.

David Daly, a chartered accountant in Dubai, said there remains little awareness among many business - and some appear to believe the tax won't come in.

"Unfortunately, I’m not sure it will particularly shift organisations' attitudes in preparation for the UAE’s VAT environment when it goes live on the 1st January 2018," he said.

"The release of the Tax Procedures Law has been trailed for many months and while it represents an important step in formalising the UAE’s statutory approach to tax more generally, there remains an unconscious defiance that VAT will actually happen."

Michael Patchett-Joyce, a commercial lawyer and arbitration specialist based in London and the UAE, said the threat of a fine or "a prison sentence and a monetary penalty not exceeding five times the amount of tax evaded" should be a wake-up call for companies.

"Ignorance of the law might be blissful, but is no excuse. The pace of legislative development will quicken over the coming months.

"Businesses need to keep abreast. Only the adept can hope to meet their tax obligations."

A survey from global auditors EY in March found half of companies were not ready for VAT and only 11 per cent had looked at the changes needed to their operations and IT systems. Another study two weeks ago by ACCA and Thomson Reuters found less than 40 per cent have the in-house ability to manage the process.

The Federal Tax Authority has said organisations will be able to voluntarily register in the third quarter of this year.

Some organisations may be waiting to see the details of the UAE VAT law before fully pushing ahead with preparations.

But Mr Daly said businesses know enough to begin the process.

"With only five months of 2017 remaining, organisations need to urgently surrender their inactivity to this additional portent and prepare for VAT."

Of those that have not begun the process there are two options.

"One group will put in the cheapest solution they can find...and it won't work...and they'll be fined and have to do the project again.

"The second group will just ignore it until the fines arrive."

For the Government, the introduction of VAT marks a major opportunity to generate income at a time when the country is looking to reduce its reliance on oil.

VAT is estimated to generate Dh12 billion in the first year, and between Dh18 billion and Dh20 billion in the second year.

The UAE Ministry of Finance has been encouraging businesses to contact it on social media, using online chat facilities and videos to engage with companies.

Sheikh Hamdan bin Rashid, Minister of Finance and chairman of the Federal Tax Authority, said on Monday it was working "to establish an optimal legislative and executive environment to ease the nation into the VAT and excise tax systems".