January 1, 2018 represents a historic date for the UAE as it introduces Value Added Tax. In 1974, Sir Anthony Barber was responsible for introducing VAT in the UK and famously called it a ‘simple tax’. I am doubtful that many would agree with his statement today.
Many would have spent time during 2017 suitably preparing for the introduction of VAT, while others would have completed a swift, essential exercise only to try and catch up with the new laws by the end of the year. Whichever category you fall into, what will the first 100 days of VAT mean for you?
Winston Churchill once said, “Let our advance worrying become advance thinking and planning.” So, where do you want to be on day 100? Ideally, equipped with a robust VAT compliance process, suitable controls and commercial framework. To have a good headstart, it is assumed that the impact of VAT has been assessed and implemented, VAT registration has been applied for where necessary, and a Tax Registration Number (TRN) has been issued.
Day 1, week 1, VAT start
VAT is effective from the start of business on 7am on January 1, 2018.
Customer communication / Signage / Systems
Inevitably, the hospitality and retail sectors will be first to feel the effects of VAT. Staff training and communication are essential to help deal with any consumer enquiries on pricing and receipts. Point of sale systems should include VAT. Signage for customers ought to help.
Consider a contingency plan for systems failure and make sure that there is a manual back-up to ensure business continuity.
Consider having systems support, communications teams and finance representatives on standby to deal with urgent issues as and when they arise.
Stakeholder communication plan
Establish a stakeholder communication plan where regular updates will be provided to avoid anxiety and tension. Short communications are recommended at the end of day 1, weeks 1, 2, 3, 4, 6, 8, 10, 12.
Goods returned / Pricing strategy
Consider the scenario for returned goods. It is perhaps unlikely that goods will be returned on January 1, but overall, some goods purchased in 2017 will be returned in 2018. As no VAT was paid in 2017, VAT cannot be refunded in 2018. It is thus essential that the system identifies the product and VAT code and applies appropriate treatment.
Consider this situation: A customer buys a shirt for Dh100 in 2017 and returns the shirt for a replacement in 2018 where that same shirt is now Dh105. Many questions will arise for this transaction:
Is it treated as a like for like replacement?
Is it a refund and new sale with an extra Dh5 payable or is a Dh5 discount given?
These are ultimately commercial decisions taken by the companies, but the sales assistant at his or her level will require guidance and a set process to follow.
Tax Credit Note
Where goods are returned and / or there was a change in price or error, a tax credit can be issued to resolve the issue. A tax credit note includes information similar to the tax invoice, but must refer to it. There is also a requirement to show the original value and VAT, new value and VAT and the delta value and VAT.
Areas for clarification / gap analysis
At the end of week one, an assessment of what is working and what is not should be done. Any areas that require clarification or gaps found should be highlighted and actioned.
Week 2: Tax invoice
By the end of week two, the first batch of tax invoices will be received. It is essential to know what constitutes a valid tax invoice, not least because without one, there is no ability to recover VAT on the cost.
Import VAT can be subject to reverse charge provided that your customs number is linked with the TRN. If this is not the case, import VAT may have to be paid in order to clear the goods through customs. This import VAT is then recoverable on the VAT return, but the process may result in negative cash flow.
Check you are getting adequate system support for your transactional/reporting needs. Overreliance on manual workarounds may cost you precious time and effort in data reconciliation. Automation in VAT compliance can be achieved through appropriate enhancements to existing systems or implementation of bolt-on tax-compliance software.
Consider the employee expenses policy. Is it clear on the invoice and are VAT requirements sufficient to permit VAT recovery? Does it allow for business entertainment and does it ensure that such VAT is blocked from recovery?
VAT payments are required to be made via a credit card with a 2 per cent supplement or via the eDirham system. Obtaining an eDirham account is similar to opening a bank account and therefore can take around five business days. Plan to ensure that you have the account and/or contingency to buy sufficient prepaid eDirham cards before the end of January to help you comply with the payment terms.
VAT compliance calendar
Establish a VAT compliance calendar with key dates depending on the frequency of return submission. Build time to draft, test, review and amend the return, and to obtain signoff. Consider the submission and payment.
The VAT team
Who in the organisation is responsible for VAT? Is it the in-house VAT manager? Is it the CFO, finance director or manager? Is it the operations or logistics personnel? Is it the accountant?
It is essential that whoever is responsible for VAT is suitably qualified and experienced. In the majority of cases, the VAT team will comprise of individuals within and outside the business. Even in-house and experienced VAT managers will require external support as they grapple with the new laws and procedures.
Draft first VAT Return
Once there is live data in the system, run reports sufficient to complete a draft VAT return. Test the processes and controls.
Review and submit first return
Ensure data is complete and accurate and that the responsible person is available to sign-off in accordance with your internal governance.
March 2018: When things go wrong?
VAT is a transaction tax and so there can be significant potential for error. The best way to avoid a penalty is to ensure complete, accurate and timely reporting. However, mistakes can happen, invoices can be received late, and liabilities can be misunderstood. Getting VAT wrong will be a costly exercise considering the extensive penalty regime. One way to help mitigate a penalty is to make a voluntary disclosure of the error to the FTA.
The writer is Partner and Head of Indirect Tax – KPMG in the Lower Gulf.