When a new business is established, it normally requires a certain time to generate earnings through sales of goods and rendering services. In the meantime, a business continues to incur expenses to rent an office, pay utility bills, purchase goods and services to run daily operations as well as expenses relating to business development and marketing. Bills and invoices of such expenses are mostly received with VAT charged at a rate of 5% by vendors. If a business is not registered for VAT purposes and does not file tax returns, then VAT paid on goods and services needs to be absorbed as an additional cost.

To support new businesses, the VAT legislation of the United Arab Emirates (“UAE”) allows for a voluntary tax registration even in the absence of taxable supplies (i.e. supply of goods and services) if it is proved that at the end of any given month, the total value of expenses incurred during the previous 12-month period has exceeded or it is expected that total value of expenses will exceed during the coming 30-day period the voluntary registration threshold of AED 187,500.

It is important to note that for voluntary registration, expenses should include only those that were subject to the standard tax rate of 5% and incurred in the UAE.  Further, the Federal Tax Authority (“FTA”) determines the evidence it may deem necessary to demonstrate eligibility for voluntary tax registration.

Where a business has applied to register voluntarily, the FTA will register it with effect from the first day of the month following the month in which the application is made, or from the such earlier date as may be requested by the business and agreed by the FTA.

VAT recovery

The voluntary registration enables a business to commence the recovery of VAT earlier not waiting for a mandatory registration threshold and also recover VAT paid on purchases of goods and services (including imports) prior to the tax registration on the first VAT return submitted following the registration.  However, it is important to consider that VAT cannot be recovered in any of the following instances:

1. The receipt of goods and services for purposes other than making taxable supplies.
2. VAT relates to the part of the capital assets that depreciated before the date of the registration.
3. If the services were received more than five years before the date of the registration.
4. Where the goods were moved out from the UAE before the date of the registration.

Example:

Let us analyze an illustrative case of how a business can benefit from voluntary VAT registration. A company set up its business in the UAE to provide artificial intelligence (AI) services on 1 January 2021. On 15 June 2021, the Company managed to secure only one contract amounting to AED 100,000 and incurred the following expenses:       

The total amount of taxable supply of service is still less than both mandatory (AED 375,000) and voluntary (AED 187,500) registration thresholds. However, the total amount of taxable expenses has exceeded a voluntary registration threshold and therefore, the Company can still apply for voluntary registration in June 2021. Upon the completion of the registration, the Company will be able to recover VAT paid totaling AED 9,850 on the first VAT return submitted following the registration.

How can we help you?

As experienced tax professionals and accountants, we can assist you with the registration / de-registration and filing of VAT returns. We can also evaluate how VAT affects your business and determine what improvements are necessary to business processes and accounting systems.

Our team consists of highly qualified tax advisors and accountants with many years of international experience from the “Big 4” accounting firms and various industries.

Abbos Maksudov,

Manager, Accounting and Tax Services