VAT is the acronym for “value-added tax”.
VAT is an indirect tax based on consumption of goods and services.
Businesses over a certain turnover threshold (known as "vendors") are required to register for and charge VAT on the supply of taxable goods and services, at a percentage rate determined by the Government in order to raise revenue.
Many countries apply a form of indirect or consumption tax similar to VAT, and although these tax systems are known by different names, for example, as GST (Goods and Services Tax / General Sales Tax) they are in essence the same.
The predominantly accepted essential characteristics of VAT are as follows:
- VAT applies mainly to transactions related to goods and services
- It is relative to the price charged for the goods and services
- It is charged at each stage of the production and distribution process
- A vendor may deduct the VAT paid (input VAT) during the preceding stages of goods and services acquired from the VAT charged (output VAT)
- The final burden of VAT lies with the consumer.
As VAT is an invoice-based tax, vendors usually become liable to account for VAT on the date of invoice (accrual basis), however, in some cases it is accepted that the liability only arises on receipt of payment for the invoice (cash basis).
As a general rule, VAT should not become a cost to your business but some expenses where input tax is explicitly denied will result in increased costs, the most typical of these being entertainment costs.
An enterprise must distinguish between taxable supplies and exempt supplies.
Taxable supplies - VAT is charged at either the standard rate or zero rate.
Taxable supplies do not typically include:
- Labour services by employees to employers;
- Hobbies or any private recreational pursuits (not conducted in the form of a business);
- Occasional private sale of personal or domestic items.
- Governments usually zero rate the provision of goods and services in certain business sectors for VAT, such as education, social services and medical services.
Exempt supplies – VAT is not charged on items as would be defined by the relevant legislation from time to time and Governments mostly exempt certain basic food stuffs from VAT.
Distinction between zero rated and exempt is important as input VAT can be claimed when goods or services are zero rated but cannot be claimed on supplies that are exempt.
Typically, there is a limited range of goods and services which are either exempt, or which are subject to tax at the zero rate (for example, exports are taxed at 0% under certain circumstances in certain jurisdictions).
Most VAT systems are destination based, which means that only the consumption of goods and services in the country are taxed which will include imports into that country.
Companies in the UAE that record annual revenues over $100,000 will be obliged to register under a Value Added Tax (VAT) system, and will accordingly be taxed, according to Younis Al Khoury.
The duties and responsibilities of a vendor can be very onerous upon company management.
VAT charged on supplies made (output VAT) less VAT paid to your suppliers (input VAT) and other permissible deductions = the amount of VAT payable/refundable.
VAT payments are usually calculated by the vendor and assessed by way of a declaration submitted to the government department responsible for VAT collections.
Some countries adopt a credit system for refunds vs refunding the vendor when in credit, and refunds are typically only made after an audit procedure.
The fact that there are refunds under the VAT system and that it is self-assessed, makes it tempting for vendors to overstate input tax or to under declare output tax.
Revenue authorities will in time catch up with offenders and the consequences are usually a big deterrent, however with good administration and compliance systems this can be avoided.
VAT PRACTICAL EXAMPLE
The VAT Services Group, a division of BMT Limited in association with World Synergy Consultancy, PO Box 938604, Dubai.