What is VAT?

VAT (Value Added Tax) is a 5% indirect tax levied on the supply of most goods and services in the UAE. It was introduced on January 1, 2018, as part of the GCC-wide tax agreement to reduce reliance on oil-based income.

Why Was VAT Introduced in UAE?

The main reasons:

• Diversify government revenue
• Improve infrastructure and public services
• Align with global tax systems

Who Needs to Register for VAT?

VAT registration is mandatory for businesses if:

• Taxable turnover exceeds AED 375,000 in the past 12 months or next 30 days.
• Voluntary registration is allowed if turnover exceeds AED 187,500.

Note: Freelancers, influencers, e-commerce sellers, and service providers are also required to register if they cross these thresholds.

What are Taxable Supplies?

These include:

• Sale of goods and services
• Imports
• Commission or agent fees
• Lease or rental of commercial properties

What Goods/Services Are Exempt from VAT?

Some sectors are exempt:

• Residential rental (post first sale)
• Certain financial services (e.g., life insurance)
• Local passenger transport

What is Zero-Rated in VAT?

Zero-rated items are taxable at 0%, but the supplier can claim input VAT credit:

• Exports of goods/services outside GCC
• First sale of residential property (within 3 years of completion)
• Healthcare and education (under conditions)

What is Input and Output VAT?

• Output VAT: Charged on sales
• Input VAT: Paid on business expenses

Businesses can reclaim input VAT if it relates to taxable supplies.

How is VAT Calculated?

Example:
If you sell a product for AED 10,000:
VAT = 5% of AED 10,000 = AED 500
Invoice total = AED 10,500

If you spent AED 2,000 + AED 100 VAT on supplies:
Input VAT = AED 100
Payable VAT = AED 500 – AED 100 = AED 400

When and How to File VAT Returns?

• VAT returns are usually filed quarterly or monthly via the FTA portal.
• Returns are due within 28 days of the end of the tax period.
• Accurate records and tax invoices must be maintained.

What are the VAT Penalties in the UAE?

FTA imposes fines for:

• Late registration: AED 10,000
• Late filing: AED 1,000 (1st time), AED 2,000 (repeat)
• Incorrect return: AED 1,000
• Late payment: 2% + 4% monthly + 1% daily (up to 300%)

How to Issue a Valid Tax Invoice?

As per FTA, a VAT invoice must contain:

• Seller’s and buyer’s name, TRN
• Invoice date
• Description of goods/services
• Amount excluding VAT
• VAT amount
• Total payable

What Records Should You Maintain?

Businesses must keep:

• Sales and purchase invoices
• Import/export records
• Credit/debit notes
• VAT returns filed
• Bank statements

Retention: 5 years (15 for real estate businesses)

When is VAT Deregistration Required?

You must apply for deregistration if:

• Your taxable turnover drops below AED 187,500 and remains there for 12 months
• You stop making taxable supplies

Apply via the FTA portal within 20 business days to avoid penalties.

How Does VAT Impact Business in UAE?

• Affects pricing and profit margins
• Requires accurate bookkeeping
• Impacts cash flow if invoices aren’t paid on time

Most businesses now use Zoho Books, QuickBooks, or Tally for VAT compliance.

FAQs (Frequently Searched in UAE – 2025)

Q: Is VAT applicable to Free Zones?
A: Yes, except for Designated Zones where certain supplies are out-of-scope.

Q: Is VAT refundable?
A: Yes, businesses can reclaim eligible input VAT. Tourists also get VAT refunds at airports.

Q: Can individuals register for VAT in UAE?
A: Only if they are conducting taxable business (like freelancers or influencers) above the threshold.

Q: Is residential property subject to VAT?
A: First sale within 3 years is zero-rated; subsequent sales/rentals are exempt.

Final Thoughts

Understanding VAT is essential to avoid penalties, improve compliance, and maintain business reputation in the UAE. With proper guidance, tools, and professional support, VAT can be managed smoothly and even used to optimize costs.

Need Support with Compliance?

At Think Biz Management Consultancies, we help you:

• Understand VAT applicability and impact on your business
• Register for VAT with the FTA
• File VAT returns and avoid costly mistakes
• Reclaim input tax and stay audit-ready
• Represent your business in case of FTA queries or audits

Contact us today for a free consultation.
Let our tax experts handle your VAT while you focus on growing your business.

 

Contact us today for a free consultation.

Contact number: ‪+971 50 983 0334‬

Email ID: info@alphabets.ae