Everything that residents need to know about VAT in the UAE
So, you know value added taxation is coming – but do you know why, what it will apply to, or how to make savings in preparation for its arrival? Our friends at good magazine have you covered…
While most UAE residents are acutely aware that VAT is coming, and that it’s going to push day-to-day living costs up, until now, there has been little detail on what VAT would and would not apply to. With VAT applications and exemptions now being unveiled in preparation for its arrival on January 1, 2018, good asked DIFC-based attorney, John Peacock, to talk us through what it really means for working families here in the UAE.
“The introduction of VAT in the GCC has been driven by the World Bank and its initiatives to move GCC states’ economies away from a reliance on oil and gas, with the introduction of VAT aimed at securing more state income and counteracting the current slump in the oil price,” John explains. “All the GCC states have signed the Unified Agreement on VAT, mandating its introduction at a rate of five per cent in all GCC member states in 2018. However, the agreement also gives each state the discretion to zero-rate and exempt certain industry sectors, and as a result, VAT will apply to different products and industries around the region.”
How VAT works
VAT is a consumer-based tax on the supply of both goods and services, and is designed so that only the ultimate consumer bears the burden. With the exception of exempt and zero-rated supplies of goods and services, VAT will be payable on consumer goods and services by everyone and, as such, will affect each person’s pocket to a greater or lesser extent. The principle of “the more you spend, the more VAT you will pay” applies.
As previously mentioned, each GCC member state has discretion over certain industry sectors when it comes to the application of VAT, namely education, healthcare, residential real estate, certain financial services, local transport and international travel.
DID YOU KNOW: The advertised price of any goods or services will be deemed to be VAT inclusive. The seller will not be allowed to add VAT in addition to the advertised price of anything you are buying.
What will be exempt?
With education, healthcare, residential real estate, local transport and international travel making up a UAE resident’s biggest monthly expenses, the exemption or zero-rating of most components in these sectors radically reduces the impact of VAT on the consumer’s pocket. It is apparent that the UAE at this stage will not exempt or zero-rate non-essential food items or petrol, and that all other goods and services in the UAE will attract VAT, even if supplied by the governing authorities themselves.
No VAT will be payable on nursery school, pre-school, elementary school and government-funded university fees as these will be zero-rated. Non-government funded university fees will, however, be subject to VAT. And while further clarification is due in the soon-to-be-published Executive Regulations, the application of VAT to privately-provided educational goods and services is expected to include the supply of school books, stationary, school meals and extra-curricular activities.
Preventative and basic healthcare services and related goods and services will not attract a VAT charge – though it is important to note that cosmetic surgery and services are not considered preventative or basic, and will thus be subject to VAT. Medical insurance products will not be exempt or zero-rated, so VAT will be payable on annual premiums.
Financial services and life insurance
Certain financial services will be exempt from VAT, such as loans, mortgages and life insurance products, and Islamic banking will be treated in the same way as standard banking. Yet-to-be-published Executive Regulations will clarify further, however, all fees charged by financial institutions are expected to attract VAT at the standard rate of five per cent.
Local and international transportation
Although VAT will be added to the price of petrol, the supply of local passenger transport, such as taxis, buses and the metro will be either exempt or zero-rated, and consumers will not be affected. International transport, whether by air, sea or road, will also be free of VAT, though with the cost of the supply of these services set to increase in many circumstances, this will no doubt be passed on to the consumer in the way of price increases.
The ‘first time’ supply of residential properties (by developers) within three years of completion, for both rental or purchase, will be zero-rated, while subsequent residential leases from a ‘first time’ purchaser will be exempt from VAT. The tax will, however, be payable at the standard rate on all commercial properties, both for rental and purchase. Don’t look past the fact that the associated costs relating to properties will attract VAT. These will include service charges, cleaning services and utility charges, and accordingly the associated costs of renting or owning a property will increase. This should be budgeted for in assessing the affordability of property transactions, whether for renting or for owning.
Small and medium business operations
Any business enterprise that has an annual turnover of Dhs375,000 or more is obliged to register as a ‘vendor’ and charge VAT on the supply of goods and services, unless these fall into the VAT exempt category. This places an onerous burden upon small businesses that may not have the resources or expertise to deal with these issues, and VAT may become a significant administrative cost. Small and medium business owners and operators are urged to obtain assistance from competent VAT consultants to avoid suffering penalties and other sanctions arising from not being able to comply with UAE VAT Law by January 1, 2018, and to make sure that they have compliant systems in place.
As previously stated, due to most of the major monthly family expenses being non-VAT-able, the overall impact of VAT on the average family should not be as much as five per cent of total household spending, but families should be aware that the cost of living will increase and conscientious budgeting should prevail. It is said that there are only two things certain in life, those being death and taxes, and the inevitable certainty of taxes is now upon the residents of the UAE too.
John Peacock is Senior Associate at BSA Ahmad Bin Hezeem & Associates LLP in DIFC, where he specialises in corporate and property law.
10 VAT tips for residents…
VAT may be inevitable, but that doesn’t mean that you can’t mitigate its impact. Independent financial advisor Keren Bobker outlines her top tips for balancing the books in advance of household spending hikes…
01. Make home improvements sooner rather than later
Are you planning on having your kitchen refurbished? Maybe you want to get your garden landscaped? These services will be liable to VAT so if you get this in hand now and are invoiced before January 1, you will not pay the extra five per cent. Be aware, however, that the work should be carried out before December 31 to be exempt.
02. Get your 2018 hotel stays scheduled in advance
The cost of hotel rooms will be subject to VAT so if you have plans to stay anywhere in the UAE during the first part of 2018, you may want to book and pay in advance. Although VAT is based on when a service takes place, most hotels will not pass on the increase for advance bookings – just be sure to check your hotel’s approach when finalising your reservation.
03. Sort out your financial safeguarding
While life insurance products will be VAT-exempt, if you still haven’t sorted out your wills and guardianship for your children, the fact that legal fees will be subject to VAT should spur you to take action now before the fees increase.
04. Think about any professional services you’ll soon need
Just about every professional service will be subject to VAT, so if you intend to employ any business or consultant, whether personally or through your own business, there will be a cost saving by doing this sooner rather than later.
05. Consider buying second-hand goods
We all know there is a constant steady stream of people leaving the UAE as well as arriving, so for some items, such as electrical goods or furniture, you may want to consider looking at the second-hand option first. Not only are second-hand goods here often reasonably new, individuals selling just a few items will not be adding VAT so significant savings can be made.
06. Buy from small businesses
Under the current rules, only businesses with a turnover of Dhs375,000 a year will be obliged to register for VAT, meaning that many small and independent businesses will not need to add VAT to their prices. You will therefore be able to support independent traders, such as those selling at markets like Ripe or Arte, or via sites such as Little Majlis, without paying any extra.
07. Schedule in your visitors now
Naturally any tourists and visitors will be affected by VAT as it is a consumption tax, so if you have friends or family who plan to visit you in the near future, you may want to suggest that they come before the end of the year – particularly if, like many of us, you find yourself spending more on goods and entertainment for your guests during visits.
08. Take advantage of buy-ahead offers
If you buy any of the restaurant offer books or apps each year, try to ensure you purchase the 2018 editions before the end of this year, when VAT will be applied.
09. Hit the stores for some bulk buying
This could be a good time to stock up on household essentials, outside of the zero-rated food items. Assuming you can afford to, and have the storage space to do so, stocking up on cleaning products, toiletries, school supplies and pet food will help mitigate the impact of VAT-related price increases.
10. Take a fresh look at your medical insurance policy
While many people will have insurance provided by their employers, in accordance with the legal requirements of the Dubai and Abu Dhabi governments, for those who are self-employed, or who arrange their own plans and pay premiums monthly, it could be beneficial to switch to making an annual payment in advance. Medical insurance premiums will be subject to VAT from January 2018, but by switching now and paying upfront for the coming year, you could fend off the increase for a while.