VAT q&a: 'Can my start-up begin trading if it is not registered?'

The Dubai entrepreneur fears it may be illegal to start selling baby accessories online

The Middle East is the fifth-biggest region globally for the number of very high net-worth individuals, with a 2.8 per cent global share, says Wealth-X. Alamy Stock Photo

I own a start-up business specialising in online sales of baby accessories. We purchased our first stock from Europe and paid about Dh200,000 in VAT to customs when it landed in the UAE. I understood this was enough to enable me to register for VAT using the value of the overseas purchases, which were above the voluntary registration threshold. 

The Federal Tax Authority have refused my registration unless I am able to provide evidence of the value of my future sales. They have asked for examples of orders from my customers. As I will be selling online to consumers, I have no way of providing the FTA with the support they need to confirm my estimated sales. What should I do as I was advised not to start trading unless I was VAT registered, and it seems I cannot get VAT registered before I start trading? KJ Dubai

When the FTA first started accepting registrations in 2017, it was much easier for start-up businesses to register. Over time, the FTA has introduced stricter criteria, often rejecting start-ups that appear to meet all the requirements, as you have. However, you have been wrongly advised and you may start trading legally before you are VAT registered if you hold a valid UAE trade licence.

Businesses not registered for VAT, and who are importing goods for resale in the UAE, will pay the tax at the point of entry, which they cannot reclaim. They will then sell these goods to customers without adding VAT to the sales price.

You are selling to consumers unlikely to be VAT registered, so while you will have to pay input VAT on the import of these goods — which you cannot reclaim — you will not need to charge output VAT on the sale of the product.

You can start trading immediately but must ensure there is no mention of VAT on your website, pricing or customer receipts. Once you reach the mandatory registration threshold and register, you will start charging the tax to your customers making sure to update your website to reflect your prices are now inclusive of 5 per cent VAT.

From this point you will be able to reclaim the VAT you paid to customs at the point of initial import of the products even though you were not VAT registered at the time of import. You will also be able to reclaim preregistration VAT costs incurred for any goods or services not already consumed at the time of registration, for example, if you have licencing costs where VAT was charged and the licence lasts a year. If you are VAT registered three months into that year, you may claim nine months' worth of the VAT you were charged on the full year's cost.

Similarly, if you have sold a third of your baby accessories stock at the point you become VAT registered you may claim the tax you paid over to customs for two thirds of the products, which is effectively the stock you had on hand at the point your registration becomes effective.  All preregistration VAT should be reclaimed in the first VAT return you submit post registration.

My VAT application was recently rejected because my revenue and expenses (actual and expected) were below the threshold. When should I resubmit the application and how? While we are still not qualified, will we have to pay any fines? LM Dubai

Businesses may use either the voluntary or mandatory thresholds to register for VAT. At the start of the application process, you must state which of these basis you are registering under. You can register again once you have hit the voluntary threshold of Dh187,500 and you must register if in the next month you go over the mandatory threshold of Dh375,000. Businesses that remain under the mandatory threshold are never obliged to register; as long as they remain below this threshold, they will not be subject to any fines or penalties.

Lisa Martin, a chartered accountant with more than 20 years of commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to [e-mail]