Should I bother registering my small business for VAT?

Q Can you explain the pros and cons of voluntary VAT registration? I have a small design business selling to both businesses and consumers mostly based in the UAE. My turnover is around Dh200,000 per year and I’m confused as to why I would want to register for VAT, before I’m obliged to do so? JV, Dubai A

All companies with an annual turnover greater than Dh375,000 must mandatorily register and account for VAT, while businesses with an annual turnover of between Dh187,500 and Dh375,000 can voluntarily register.

One of the major downsides to registering is the cost of compliance. All companies, whether VAT registered or not, should already be keeping proper accounting records. If you choose to register for VAT, it’s likely you will need to employ specialist help to assist with your VAT set up and ongoing compliance. The VAT legislation is complex and penalties for getting it wrong are onerous. For small businesses the additional cost of compliance will eat into their profits.

I am hearing feedback that many large companies are reluctant to or even refusing do business with companies that are not VAT registered. There also seems to be some confusion that every company must be registered regardless of size and those that are not registered are somehow operating illegally. This is not the case and a small business below the mandatory threshold can continue to operate fully legally without ever registering.

Many start-ups or small business owners want to give their customers and suppliers the impression that they are larger or more established than they actually are, and, one way to do this is to register voluntarily. A significant benefit of this is that you can offset the input VAT you are charged against your output VAT. If you cannot reclaim the input VAT it becomes an additional cost that affects profitability. However, it is worth noting that Article 56 of the Decree Law allows VAT charged up to five years before a company registers to be offset on the first VAT return after registration. This means a start-up that is growing does not necessarily need to rush to register to avoid losing the input VAT offset.

Once a company is registered, it needs to charge VAT on its domestic sales. If the customers are consumers, who cannot reclaim the VAT charged, prices are effectively increased by 5 per cent, which may affect competitiveness and demand. Alternatively, a business may decide not to pass the tax on to its customers, which will eat into its profits as it still has to be accounted for and paid to the Federal Tax Authority, whether passed on to customers or not. Therefore, there is not one perfect solution that will fit every business. Management must consider their own circumstances before making a decision to voluntarily register or not.

Can you explain the law with regards to VAT being the advertised price and not an addition. I’ve recently experienced three situations where retailers are displaying the no VAT price and have then charged me the amount plus 5 per cent when I paid. Also, are companies aware of how VAT is collected? Adding on 5 per cent does not equate to the same as 5 per cent of what the customer pays. For example, if I buy a product at Dh1,000 and get charged 5 per cent extra – that’s Dh50 for the government. But if the Dubai Government is asking for 5 per cent of what the consumer pays ... having paid Dh1,050, should the FTA get Dh52.50? BA, Dubai

The decree law says in Article 38 that advertised prices for consumer goods and services, whether that is on price labels, shelf pricing, marketing materials, websites or menus etc, should include the tax. It is therefore illegal for these three retailers to add VAT on top of the advertised prices at the point of payment. I have heard examples where people have successfully insisted on only paying the amount advertised on the shelf or price label. Another option is to get evidence of the incorrect charging and make a complaint to the Know Your Rights section of Dubai Economy. The website has some very useful advice on how to complain to a retailer or make a more formal complaint to Dubai Economy.

Article 27 of the Executive Regulations set out a few exceptions to this rule where prices may be declared exclusive of tax. These exceptions are for exports, for supplies made to another GCC state where VAT has been implemented (currently only Saudi Arabia), or where the customer is known to be tax registered. In these circumstances the prices shown should be clearly declared as excluding VAT.

VAT is calculated as 5 per cent of the VAT exclusive price. It is not calculated as 5 per cent of the total the customer has paid. Therefore, in your example the FTA would expect to receive Dh50, not Dh52.5.