My business supplies sportswear and accessories, with one of our sales channels on a sale or return basis to gyms and yoga studios. We recently registered with the FTA [Federal Tax Authority] and want to know how to account for VAT on items not paid for by my clients until they are ultimately sold to their customer. It seems unfair to raise a tax invoice and demand immediate payment when I send stock to the gym, even though they will not pay for the goods until months later or possibly return the items and not pay at all. LL, Abu Dhabi
The sales model you describe is typically known as consignment, sale on approval, or sale or return. Under this arrangement the supplier will provide products to the buyer but the buyer is not obliged to pay until he has sold them to his customer, or he agrees to take ownership of them from the supplier.
Typically if the items remain unsold, the customer can return them to the supplier without payment. Customers like this arrangement because all the risk stays with the supplier. However, this type of sale creates some confusion from an accounting and VAT perspective.
Because the customer does not take legal ownership of the products until they are sold on, account for them as your stock until the final sale happens, even though they are not physically in your possession.
Similarly, from a tax perspective, you do not need to account for output VAT when you transfer the goods to your customer. For consignment stock, the date of supply – which typically dictates the timing of accounting for output VAT – is delayed until when your customer sells the goods to his customer or 12 months from the date you delivered the goods to him - whichever is earlier.
Therefore, raise a VAT invoice and account for the tax when your customer informs you they have sold the goods. If this occurs, and you raise the tax invoice, at the end of a VAT quarter you may still pay the output VAT to the FTA before your customer has paid you. However that is exactly the same for any credit sale.
If your customer keeps the goods without selling them for more than 12 months from the date of delivery, you must raise an invoice and account for the VAT, even though your customer might not have an obligation to pay you for the goods. If your customer keeps the goods for less than a year and then returns them to you, there is no need to raise a tax invoice or account for the output VAT on that transaction.
We imported raw materials from Spain and the value of the imports and the VAT was reflected automatically in the FTA portal. We did not need to pay VAT on this import and we reflected it as a reverse charge in the purchases section on the same VAT return. Some of the products arrived badly damaged and five months later the supplier has issued us with a credit note. Will this credit note be shown on the FTA portal, if not how should we account for it on the next return? SJ Dubai
The FTA portal only reflects purchases and associated import VAT where goods have been processed through customs. Therefore, if your supplier sends you a credit note and there is no movement of goods through customs, it will not automatically reflect on the FTA portal. While you simply account for the credit note in the usual way, because this purchase is an import without the addition of UAE VAT you must use the reverse charge mechanism, effectively as a negative purchase.
Under the reverse charge mechanism, the recipient of the goods or service is liable to pay the tax; effectively the buyer takes on the responsibility of paying VAT, which in a domestic supply would be the responsibility of the seller. From a VAT perspective, the buyer is effectively supplying himself and accounting for both the input and output VAT.
In your case, credit your purchases and reverse charge the VAT on the credit note, and debit your creditor account. This reduces the amount of reverse charge VAT that you report on your next return by reducing the input tax available for offset.
Lisa Martin, a chartered accountant with more than 20 years' commercial finance experience, is the founder of accounting, auditing and VAT consultancy, The Counting House. Email any VAT queries to pf@thenational.ae
