We work for a business that requires clients to pay part of our fee in advance before we start any work. We only raise a VAT invoice once the service is complete, which can sometimes be eight weeks later. Several clients are now asking us to issue the full VAT invoice before they pay an advance. Are we required to do this? SC, Abu Dhabi
VAT legislation does not allow you to raise a total invoice on the completion of a service if it spans a period of time and customers are required to make advance payments.
The Decree Law states you must account for VAT at the “date of supply”. For a service business, this is defined in the tax legislation as the earliest date the provision of services was completed or the date the payment was received or the date the tax invoice was issued.
Article 67 goes on to say that you must raise an invoice within 14 days of the date of supply. So in the case you outline above, you are required to issue your customers with a VAT invoice within 14 days of receiving the advance payment from them.
If you are willing to part-invoice, you can raise this first tax invoice for the value of the advance rather than the full amount of the service. You must account for the VAT on the date of receiving the payment.
Because of the 14-day rule, it might be that you receive the payment at the end of a tax quarter and only issue the invoice at the start of the next VAT quarter. You would then be accounting for VAT in one tax period and raising the invoice in the subsequent period. This can get messy to account for, so I recommend you raise and date the invoice on the date of supply so that your VAT reporting and accounting systems are aligned.
Your suppliers should receive your invoice within 14 days of making the payment to you and will be able to claim the input tax on the advance in their next return.
Can a company offering a service reclaim VAT charged on bank fees? KI, Dubai
The simple answer to your question is yes, a company can reclaim VAT on all business expenses, and bank charges fall into this definition. There are a few exemptions, such as entertaining and certain employee benefits, but bank charges are not specifically excluded.
There are, however, a number of conditions to note here. The bank account imposing the charges must be in the name of the VAT-registered company. If you are using another bank account, which is not in your company's name, such as a personal account, as many small businesses do, this would not be considered a business expense and any VAT on that bank’s charges cannot be reclaimed.
To reclaim VAT on any business expense you must be sent a tax-compliant invoice from the supplier. Most banks now routinely provide these each month and they show the bank charges subject to VAT and the amount that can be reclaimed. Make sure you do not claim more VAT than is stated on the invoice issued by the bank.
Also do not assume all bank charges on your statement are subject to VAT, although most will be. Many banks helpfully separate these charges on statements with the associated VAT shown on a separate line. ATM fees often don’t show the VAT element so be wary of these and only claim if they are on the bank's tax invoice.
The final point to note is that there are time restrictions relating to the date you receive the invoice and the tax periods in which VAT can be reclaimed. You can reclaim VAT in the first tax period you receive the invoice or the subsequent tax period. If you do not reclaim the VAT in either of those two tax quarters, you cannot do so later without submitting a voluntary disclosure. This comes with a fee of Dh10,000, so reclaiming VAT on bank charges is unlikely to be worthwhile if you are outside the specified two-quarter time frame.
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 email@example.com