Understanding VAT e-invoicing rules in UAE crucial for business owners

The recent Federal Decree Law No 16 of 2024 introduced amendments to the UAE's VAT law of 2017, including the implementation of e-invoicing. Getty Images

This week, let's shift our focus away from corporate tax. As we approach the six-month mark of its second year, it has become evident there are numerous gaps in the details, many of which I have addressed in this column previously. With the deadline for the first returns fast approaching, we can expect a rush of legislation to fill these gaps.

As advisers, we are bracing ourselves for many late evenings of analysing these changes.

Today, I am pleased to share some positive news. The recent Federal Decree Law No 16 of 2024 has brought about amendments to the UAE value-added tax law of 2017. One of the key changes is the introduction of e-invoicing. Before delving into the details, let us first provide some background information.

When an entity wishes to reclaim VAT, it is required to keep the originals of all documentation relating to that. No photocopies or scanned copies are permissible. Additionally, the originals must be legible.

This requirement poses a challenge in today's world of environmentally friendly thermal printers, as they may not produce documents that meet the necessary standards for compliance with the legislation. Business owners should be aware that, in addition to penalties, interest is also payable on any input VAT that needs to be repaid. The interest charges accrue from the date the funds were initially reclaimed.

One way to ensure compliance is by following the 2017 Certification Guidelines for Tax Accounting Software. But this required the manufacturer of the accounting software used by the invoicing party to be deemed, after annual review, compliant by the Federal Tax Authority.

This list has never been particularly long and, given the global reach of most software providers, it was understandably not often a priority.

One might imagine the move from software installed in-house solutions to cloud solutions might improve matters. However, what it has done is speed up the move from catering to national or smaller regional markets to offering homogeneous products. With internationally accepted accounting standards now the norm, software providers are left wondering what more they can do to stay competitive.

Recognising that e-invoicing requires two system capable partners, this mandatory process, which begins on July 1, 2026, will apply to both business-to-business and business-to- government transactions only.

With any announcement of this nature, there are often many details that remain unknown. However, the principles and start date have been set. It is time to begin preparations.

Some of the Gulf’s VAT framework has been borrowed from the EU, with member countries aligning their invoicing rules as an example. This will come into force once all constituent countries have implemented VAT. The original legislative deadline has passed without much discussion.

To navigate this new system, individuals will need to familiarise themselves with various acronyms, including DCTCE (Decentralised Continuous Transaction Control and Exchange). This approach requires mandated users to communicate as buyers and sellers through a Peppol (Pan-European Public Procurement On-Line) network.

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In layman’s terms, it’s an online protocol that supports cross-border transactional interoperability. Users will be able to communicate and share documents.

Think of Peppol as the programming language, which means you are going to need specific software to harness it. These software solutions will be provided by Ministry of Finance-approved platforms, known as Accredited Service Providers (ASPs). A list of these is expected by the end of 2024.

While the initial reaction may be to assign the responsibility to the finance director, a multidisciplinary approach is necessary for successful integration. For organisations lacking a standard operating procedures manual, the complexity of the process is heightened. However, it is never too late to begin developing one to streamline operations and ensure compliance.

The greatest benefits might accrue to the largest organisations that have an imbalance between labour and capital. In our region, we tend to prioritise cheaper labour over implementing IT solutions that could enhance efficiency and reduce costs in the medium term.

Take a moment to assess the number of people in your business who are solely responsible for processing paper. E-invoicing represents a form of automation that can greatly benefit operations. What other areas within the business could potentially benefit from similar enhancements?

More than two decades ago, I completed my first finance function transformation in London. The accounts payable department of 46 employees was streamlined down to two IT professionals who managed the previously paper-based operations. Since then, technology has advanced significantly.

In the realm of financial disclosure, many entities are hesitant to share their financial information with the public and private sectors, or government.

VAT returns may provide some insight into an organisation's financials during audits by the Federal Tax Authority, but under the new system the relevant authorities will be automatically sent your live transactional data as it happens. Through the use of advanced AI software, this could be interrogated.

It is crucial for businesses to have a clear understanding of their financial operations before external parties uncover any discrepancies.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE