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Abu Dhabi, UAEFriday 14 December 2018

The winners and losers of VAT, one month on 

Any newborn brings sleepless nights, says David Daly as he looks at what we've learnt from one month of VAT

Shoppers at Carrefour in Mall of the Emirates. Businesses and consumers in the UAE have begun paying VAT since 1 January 2018. Reem Mohammed  /  The National
Shoppers at Carrefour in Mall of the Emirates. Businesses and consumers in the UAE have begun paying VAT since 1 January 2018. Reem Mohammed / The National

Today I will light a candle in celebration of VAT’s mensiversary. Like anything one month old, we look to what we have learned to map our future expectations.

Firstly, arithmetic has been found lacking in many receipts: due to miscalculations by the seller, many places are in fact charging 4.5 per cent by mistake. These sellers will need to make up the difference when submitting their returns.

What has been a surprise to me is the amount of Wexpat (westernised expatriate) businesses that have depended on their knowledge of how VAT works in their home country in order to comply to rules here. As these businesses have interacted with each other and VAT-related requests and tales were traded, owners have now begun questioning how robust this solution was. In the absence of authoritative voices, these exchanges are creating their own uncertainty.

The Executive Regulations were law lite, thus recognising that it is impossible to legislate for every situation. In the absence of an authority offering FTA approved clarification, an early audit can useful as a chance to get quick decisions on a business's application of VAT. This mitigates the potential of penalties, which can be applied to every infraction.

The winners and losers of VAT so far are easily identified by their actions.

I spoke to Mark Hamill, executive director of Awards International LLC. He told me that his company have "turned the introduction of VAT into an opportunity to reconnect with customers," proving that it can be made into a positive.

He said: "During the process of obtaining Tax Registration Numbers, we are re-engaging with our entire base. [People and companies] we might not have spoken with in a while.”

The losers, however, are those who have tried to use the transition as an excuse to overcharge their customers – the press has diligently reported the FTA’s many interventions during January, when unscrupulous sellers have attempted just that. The critical failure of these businesses was ignoring that customers are already increasingly sensitive about the high cost of goods. Customers lost are not likely to return.

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Carrefour more cleverly chose to award loyalty card points equal to the value of the extra cost of VAT on items. The cost to them is likely to be 1 or 2 per cent of the transaction value of an item, which is well within its marketing budget. Fitness First was caught up in some confusion when they requested members who signed up last year for a one year membership that they pay the extra 5 per cent VAT this year; however, a senior government official said health clubs could not charge VAT on membership contracts issued last year, unless they made clear reference to the tax at the time.

Any newborn brings early sleepless nights, now the challenge is what's to come a few months down the road.

David Daly is a chartered accountant (Cima) who leads a consultancy practice in the UAE.