Introduction

How to calculate VAT in UAE ? is very commonly asked question because the effect of VAT was introduced at the beginning of 2018 in the United Arab Emirates (UAE) which introduced considerable change in taxation systems in the region. This was embraced by the UAE as a member of the GCC following a joint agreement, which sought to introduce the taxation system in the Gulf region to diversify sources of governmental revenues other than oil. VAT has recently become part of the UAE’s daily reality and affects everyone, both directly, as consumers and indirectly as producers or business persons.

The following is a brief blog post for all the businesses operating in the UAE and explains how to calculate VAT. Hence, knowledge of VAT is important, regardless of if you are a start-up or an existing enterprise since failure to observe tax laws on VAT attracts penalties.

What is VAT?

VAT is referred to as a value added tax which is a form of indirect tax that is charged on the supply of goods and services. It relates to almost all forms of supply that organizations buy and sell in the UAE and which have been mentioned above. Pricing is the ultimate burden of VAT whereby it is passed to the consumers in the form of a percentage that is included in the price of all goods and services. Nevertheless, businesses must collect and pay the VAT to the Federal Tax Authority (FTA).

In UAE regular VAT for any product or service is set at 5% while there are some products or services that are excluded from VAT or are charged at a different rate. Companies and individuals that are registered for VAT have to include this tax in the price of goods and services they sell which are referred to as outward VAT supplies; they are also allowed to offset against their VAT account the amount of inward VAT paid on acquired goods and services used for their business activity.

Understanding VAT in the UAE

Standard Rate: 

The UAE has a standard VAT rate of 5% which applies to a majority of supplies of goods and services.

Zero-Rated Supplies:

 Zero-rated goods and services include; most healthcare and education services, international transport, and exported goods and services.

Exempt Supplies:

 Some examples of exempt supplies include the supply of residential lets, specific financial services, and local tour services. It shall be seen that businesses that only supply exempt supplies cannot recover the VAT charged on their inputs.

Threshold for VAT Registration:

 A firm or company that has a turnover that is subject to tax of more than AED 375,000 per year would be required to register for VAT. Some other categories of registrants include those who register voluntarily where the value of the taxable supplies is more than AED 187,500.

Filing Returns:

 Most businesses complete and file at least one set of VAT returns each quarter, though the FTA has the power to adjust how often a business needs to do this based on the scale, or risk level, of the business.

How to Calculate VAT for Businesses in the UAE

VAT calculation is not complex, but a lot of attention should be paid to record-keeping and identification of the supplies and expenses subject to the tax. Below are the procedures that one is required to follow to calculate VAT for his/her business in UAE.

Step One: Decide Whether Your Organisation Requires To Sign Up for VAT

The first thing that you must do when calculating VAT is to decide whether your business is eligible for VAT registration with the FTA. An individual must register if his taxable supplies and imports go over AED 375,000 in a year. You register on your own volition if your business makes taxable supplies that exceed AED 187500 and are less than AED 375000.

To calculate your taxable turnover: 

Sum up the equivalent in price of all the tasable supplies that is the sales of goods and services affected by your business.

This can take one to include the zero rated supplies in the total as these supplies are still considered taxable for purposes of registration levels.

This is true especially if your business organization surpasses the mandatory threshold, in which FTA registration is compulsory.

Step 2: Know your taxable supplies

This explains taxable supplies as supplies of goods and services that are liable for a particular value added tax at either an ordinary rate of 5% or at the zero rate of 0%. To calculate VAT accurately, you need to distinguish between: 

1. Standard-Rated Supplies:

 The categories that attract a tax rate of 5% are; commodities that are consumed in the market like perfumes, cosmetics, clothes, and shoes, and services from professionals such as accountants, lawyers, IT professionals, doctors, and other consulting professionals, manufacturing and production of goods.

2. Zero-Rated Supplies: 

Goods and services that are exempt from being taxed such as; exported goods, international transport, and some health and educational services.

3. Exempt Supplies:

 These do not attract VAT and a business that supplies exempt goods and services (such as financial services or local passenger transport) cannot recover VAT on its expenses.

After you have identified the kind of sales or services that you are providing, then it becomes easy to know and apply the right VAT rate.

Step 3: Charge VAT on Your Sales:

Once your business has been registered for VAT you are mandated to levy VAT on the sale of taxable products and services. Here’s how you calculate VAT on sales: 

Determine the VAT Amount: Regarding the standard rated products or services you simply apply a VAT rate of 5% on the sale price of the product or service. For instance, where you sell products for AED 1,000 the amount of VAT that would be payable shall be AED 50 1,000 x 0.05.

Total Amount to Charge: Finally the VAT amount is added to the sale price The formula is Sale price = base price + (VAT rate * base price). In this case, the total amount charged to the customer is AED 1,050 (1,000 + 50) thus it has been recommended to set a minimum charge of AED 1,000 to the customer.

Formula to Calculate VAT on Sales: Total VAT=\text{Total Sale Price} \times \text{VAT % (5%)}

Step 4: is commonly known as Reclaim VAT 

As a VAT-registered business, it is also possible to recover VAT on business purchases. This is known as input VAT Input Value Added Tax refers to the amount of VAT that can be claimed as credit by an organization on the supplies that it has bought or received from another party or organization. To reclaim input VAT:

• • Keep Accurate Records: All expenses that have VAT have to be recorded in a detailed manner with documentation that can easily be audited. The rule for reclaiming input VAT is that only expenditure which is referable to the business is allowable.

• • Categorize Your Expenses: This is very important so that you can be able to distinguish between taxable expenses and those that are not taxable. This means that it is only recoverable insofar as the input goods and services are themselves taxable.

• • Calculate Input VAT: In any business purchase, the VAT should be calculated in the same way as how it is for any business sales. For instance, if you bought a service for AED 5,000 while the supplier levied 5% VAT, then you will have an input VAT of AED 250 (5,000 x 0. 05).

Formula to Calculate Input VAT: Input VAT = Purchase Price \times Output VAT ( x 5%)

Step 5: Net VAT Payable ( or Net VAT Refundable )

After calculating the output VAT that is the VAT charged on your sales and the input VAT the VAT charged on your purchases, the last step is to find out whether you are required to pay more VAT or need a refund.

To do this, subtract the input VAT from the output VAT: To do this, subtract the input VAT from the output VAT:

Formula to Calculate Net VAT Payable: = output VAT- Input VAT

The Net VAT Payable is calculated on the simplified equation Output VAT – Input VAT.

If your output VAT is higher than your input VAT then this means that you will have to make a payment to the FTA.

That mood, if your input VAT is more than your output VAT, then you are supposed to be given a VAT refund.

For example:

Output VAT on sales: 5000 units in Egyptian pound

Input VAT on purchases: Any amount less than AED 3,000 shall not be subject to purification.

Net VAT Payable: 250 USD (625 – 375)

In this case, your business would cost AED 2000 to the FTA.

Step 6: File Your VAT Return

If you have determined the amount of VAT payable or refundable you need to complete a VAT return to the FTA. In the case of UAE, VAT returns are filed quarterly and in some cases based on the size and risk level of a business as determined by FTA, it may be required to file monthly or annually.

Step 7: Penalties for Non-Compliance

The following are some of the requirements that need to be fulfilled so as not to be penalized for not conforming to UAE VAT law. The FTA imposes fines for a range of non-compliance issues, including: 

• • Late Registration: It is important that the business registers for the VAT within the right time to avoid being penalized.

• • Failure to File Returns: In case you fail to meet the set deadline in submitting the VAT return, then the FTA is at liberty to inflict penalties for having failed to file the return on time.

• • Late Payments: Entrepreneurs can be penalized for delays in payments for VAT or Value Added Tax, thus;

• • Record Keeping: To abide by the law Businesses should ensure that they keep records of all their VAT for at least five years. Lack of record keeping or else issuing wrong reports can also attract fines.

Conclusion

Don’t worry about how to calculate VAT ? Use a VAT calculator UAE to accurately determine your VAT liabilities and claims. If you need further guidance or expert assistance with VAT registration, filing, or compliance, reach out to a tax consultant or explore our in-depth resources to help you navigate the VAT landscape with confidence.

Stay compliant, stay informed, and let your business thrive! Contact us today for expert advice or to learn more.