Never assume a question about VAT is silly

VAT is creating many 'I wish I hadn't thought of it moments’ as we countdown to its introduction in the UAE on January 1.

With this in mind, in the third in the series of VAT tales, I recall those moments where questions at seminars I’ve been presenting have stumped me and opened our eyes to some important points about the new tax.

Invisible ink

A finance manager asked me whether the company she worked for would receive a tax invoice from, say, a supermarket, for products purchased so that VAT could be reclaimed.

After assuring the person that the VAT element could be reclaimed, a thought stuck me. I keep all my financial records. Accounting can be habit forming and what I have noticed is that the details on many point-of-sale receipts fade away over time - sometimes within a very short period. This is because thermal printers have replaced ink devices in many retail outlets.

Given the legal requirement to keep supporting documentation for five years, should these be requested during a VAT audit, an auditor would be hard pressed to unearth any pertinent information. Is there a legal obligation on the part of the seller to produce an invoice with a five-year life? You hope the courts would be sympathetic if this scenario were tested.

Unable to produce any supporting paperwork to a claim would result in a fine. The onus is always on the entity claiming input VAT. Photocopies or scans will never suffice. It must always be an original to prevent duplication of claims.

It is likely that some provision will be made for official duplicates. This burden of labour would fall to the supplier to recreate the original invoice and include additional affirmations that the copy is an original reproduction. High volume environments might be reluctant to accept these requests.

Order of events

Only an accountant could be so pernickety as to classify events. Until now these only included cash and accounting. A cash event would be the payment for, say, a new computer. The accounting event would be the depreciation over the lifetime of said computer.

Excited accountants are welcoming the newest classification: the VAT event. Less so are the attendees at seminars who are just getting acquainted with accounting events.

The order of events matters for VAT and all depends on which of the following comes first: advance payment, invoice received, or when the goods or services are delivered.

Say the computer was delivered on March 31, invoiced on April 2 and paid for on May 3. Further, let’s say the VAT reporting period ends on March 31 and a new one begins on the April 1.

The VAT event happened on March 31 and will be reported as part of the VAT submission for that period.

The accounting event happened on April 2 and will form part of profit and loss revenue for April.

The cash event happened a month later and only now will title (ownership) pass to the customer.

The cash event happened a month later and only now will title pass to the customer.

What is critical to remember here is that the invoice will have two dates. One will be the date of supply (the VAT event). The other will be the invoice date (the accounting event). Failure to show a date of supply is a breach of VAT rules and will attract a penalty.

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Read more:

Lots of positives from the VAT draft regulation, but challenges remain

Who will bear the burden of VAT in the UAE?

VAT in UAE: a guide to what will be taxed, exempt or zero-rated

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Hokey cokey

Many SME’s tell me that they have been conducting their financial and personal affairs from the same bank account. Cars that are both personal and business are (unfortunately) another common set of co-habitants.

A company car that has personal use cannot have VAT reclaimed on it. The car is not wholly and necessarily being used in the conduct of the business. If it was purchased before today, then there are no VAT implications just yet. If it is leased, then the VAT charged after January 1 will not, in this example, be reclaimable.

When the car is sold, it will be sold without VAT being levied. Not so your boardroom table purchased at the same time. When selling that table, VAT will be levied on the customer.

The rule is VAT in, VAT out. The table would normally have had VAT levied on its purchase and therefore a registered entity would levy it on its sale. The opposite would apply to the car in this example, as VAT would not have been reclaimable on its purchase.

Now you see me

A couple of weeks ago a draft copy of the Executive Regulations appeared on the Federal Tax Authority’s website. Like the mayfly, it fluttered around for just hours and quietly disappeared.

There was much detail in its 53 pages, although I admit I was expecting something a bit longer. The file was downloadable and many of us took advantage and grabbed one.

As the pages were watermarked ‘draft’, I’m reluctant to go into any great detail as they do remain subject to change. However, I think it’s important to say what was written about designated zones. These are free zones that are securely fenced.

Only goods imported into the country and re-exported without landing onshore will be treated as outside the UAE. All services, regardless of where they are delivered in the UAE landmass are subject to VAT. This was unexpected.

If this version makes it into the State issued gazetted form, then the VAT net has been cast much wider than this group of coffee quaffing accountants ever expected.

As VAT draws every nearer, what at first might be dismissed as a silly question, could easily contain a nugget of something much larger hidden deep within.

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