What is VAT in the UAE?
Value Added Tax (VAT) is an indirect tax on the consumption of goods and services in the UAE. The standard rate is 5%. Businesses that are registered for VAT are required to charge this tax on their sales and can reclaim the VAT they have paid on their business-related purchases.
VAT Registration Thresholds
Not every business needs to register for VAT. The Federal Tax Authority (FTA) has set specific turnover thresholds:
Mandatory Registration:
It is compulsory for a business to register for VAT if the total value of its taxable supplies and imports in the last 12 months exceeded **AED 375,000**.
Voluntary Registration:
A business can choose to register voluntarily if its taxable supplies and imports in the last 12 months exceeded **AED 187,500**.
How VAT Works: Output vs. Input Tax
When a VAT-registered business makes a sale, it charges 5% VAT to the customer. This collected amount is called **Output Tax**.
When that same business buys goods or services for its operations (e.g., office rent, software subscriptions), it pays 5% VAT. This paid amount is called **Input Tax**.
On a quarterly basis, you file a VAT return. You pay the FTA the difference between your Output Tax and Input Tax. If your Input Tax is greater than your Output Tax, you can claim a refund.
Key Compliance Obligations
Once registered, you must:
- Charge VAT on taxable goods or services you supply.
- Issue tax-compliant invoices.
- Keep business records to support your VAT returns for at least 5 years.
- File VAT returns, usually on a quarterly basis.
Final Thoughts
Understanding your VAT obligations is crucial for doing business in the UAE. Proactively monitoring your turnover against the registration threshold and maintaining meticulous records are essential steps to avoid significant penalties and ensure smooth operations.