On the 24th February, it was announced by His Excellency Obaid Al Tayer that the UAE will implement VAT at the rate of 5% from the 1 January 2018. This is in line with the neighbouring GCC states also implementing VAT at around the same time or by 1 January 2019 at the latest. These measures have been taken by the Oil rich GCC states in order to further diversify their economies away from hydro carbons and into more sustainable sovereign income.

VAT is a popular consumption tax which is implemented by over 150 countries around the world; a variant of VAT, called “Sales Tax” is also similar to it, but differs slightly in its implementation. It is an indirect tax on consumption which is charged and collected at each step of the supply chain and is ultimately paid by the final consumer of the good or service.

Although the rules and regulations on VAT is yet to be published, it has been announced that there are likely to be exceptions on basic food items, healthcare and education with the rate of VAT varying between 3 and 5 per cent.

There will also be a number of phases during implementation, with phase one requiring companies with annual revenues of over  Dh3.75 million to register for VAT and companies whose revenues range between Dh1.87 million and Dh3.75 million will having the option to register. During phase two, it is likely that registration will become obligatory for all companies but the ministry is still discussing a date for that.

It is also understood that as a result, the UAE stands to earn estimated revenues of between Dh10 billion and Dh12 billion in the first year of its application.

What this means for small business?

Although the implementation of VAT is more than a year away, small and medium sizes business should be looking at their business models now to decide whether they need to prepare. Although revenue limits of the business is a major factor, so too is type of business as a business maybe engaged in activates where VAT may in most cases be a net receipt.

Other factors to consider is also ensuring that receipts and invoices are able to be modified to include and collect VAT information, ensuring that accurate and real time accounting records are being collected and to keep all financial transactions stored in a secure and easy to review location. Accurate Cash flow reporting is also a very important factor to consider as VAT is likely to be paid quarterly. If business do not manage their cash flow to time their quarterly payments, penalties and fines for late payment could be charged.