While Value Added Tax (VAT) has been effective in the UAE since January 2018, many SMEs remain perplexed as to the process. The fact that the voluntary threshold for registration is set at AED187,000 while the mandatory threshold is at AED375,000, has made the registration process even more puzzling.
At the Arabian Business Start Up Academy, we spoke to a number of experts to find out the best ways in which SMEs can implement the new tax, and how those who have registered managed to adapt to its introduction.
In what ways have start-ups struggled with the recent introduction of VAT, and how can they make the best of it?
Mansoor Sarwar: VAT is not a direct cost to businesses. It should be passed onto the customer as it is a consumer tax. To put it bluntly, it is an indirect tax and businesses are collection agents for the government, who will then invest it back into the country. If done properly, it should boost the economy. The Ministry of Finance expects to receive AED1.6bn in revenues from VAT in 2018, which will result in 1.6 percent GDP growth.
Colin O’Malley: The biggest challenge was that the actual law wasn’t released until the 11th hour, so everyone was shooting in the dark, so to speak. Even when businesses visited the Federal Tax Authority (FTA) website to get some direction, most of the documents were written in complicated legal terms – even as an experienced accountant, I couldn’t understand them fully. Luckily, things have changed and more user-friendly documents and tax user guides have been introduced.
What are some of the grey areas that you have come across so far?
CO’M: Imported goods is one. Theoretically, what is supposed to happen is that you have to pay the tax on goods that are imported in the country based on their cost if you’re not VAT-registered. But if you set yourself up correctly in terms of getting your Tax Registration Number (TRN), and you leave that number in the customs’ importation website, you can actually take those goods in tax-free because you declare them on the website. But if you’re not clear about that, and many people weren’t, you end up paying an extra five percent charge on imported goods. It’s called a reverse charge mechanism and it was a massive grey area.
MS: Another is the voluntary registration threshold of AED187,000, in which case you don’t have to declare that income or produce your bank statements. But what you can do is produce your business plan that projects you to grow beyond that threshold, and which the FTA accepts as a valid document to issue a TRN number for you. So it’s not that you have to prove to the FTA that you have billed AED187,000; it could be your plan for the next 12 months. The FTA wants you to register, no matter how small or big you are, because the key is to bring transparency to the whole economy. They are unlikely to tell you, “You are too small to get a TRN number”. It is usually the other way around.
How have each of you dealt with VAT in your industries?
Imad Hammad: As a marketplace for used cars, the transaction fees on CarSwitch can be quite large so five percent does make a difference. We saw a lot of purchases on new cars at the end of last year because people wanted to avoid VAT. While we have an advantage in that VAT does not apply to the used cars themselves, we have still seen some customers remain conservative about their spending.
Ibrahim Colak: We implemented VAT systems two months prior to January 2018. But we found that a lot of our service providers were not that sophisticated when it came to logging their finances and many used notebooks to follow up with their payments. We invested a lot in workshops to teach them how to pass VAT onto consumers. Our transactions are not that hefty, so we had to round up or down the numbers and make adjustments. For example, if our price was 31.5 percent, we charged 30 percent.
Rami Shaar: Our approach to VAT was, “How will the market change? How will competitors react?” We focused on squeezing every dollar out of our operations in order to prepare for a major price cut in 2018 because we expected a lot of our consumers to be bargain hunters. We also took the decision to exclude the tax from our pricing because if you have a shirt for dry cleaning and pressing for AED7, you can’t possibly increase that to AED7.35 – or even AED8, which is a 12 percent increase.
Are consumers willing to pay more?
IH: We saw different challenges when it came to passing the tax onto consumers because we had to educate them on where VAT applies. Some of them were pointing out that VAT doesn’t apply to used cars. But we are a service provider and VAT is applicable to the service element. It was difficult to explain that to customers in a way where they don’t feel they are being deceived or ripped off.
IC: People who are paying a little have already accepted that VAT is coming and that they will be charged more, so they didn’t create any issues. But for the more expensive services such as landscaping, many of our customers wanted to finalise everything before January. And after the introduction of VAT, some were asking us of ways to avoid paying the tax. For example, by not getting an invoice. But we don’t work this way. We tried to explain that it is better for everything to be documented because if they don’t have invoices, they can’t prove anything if there’s a problem.
Rami Shaar: The margins in the laundry industry are quite thin, so there is no way businesses would take on VAT. Many, though, are passing on much more than five percent. Our approach is different in that we wanted to be more competitive by making the customers feel they are getting a bargain. And they are.
The next Start Up Academy is scheduled for June.
Rami Shaar, founder and CEO of laundry service mobile app Washmen
Mansoor Sarwar, regional director for technical services at accounting firm Sage Middle East
Ibrahim Colak, founder and CEO of online service provider MrUsta
Imad Hammad, founder and CEO of online car marketplace CarSwitch
Colin O’Malley, finance and administration director at Virtuzone
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