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Start adding VAT clauses to your service contracts, lawyers warn

If a contract is silent on the issue of tax, lawyers are advising clients to renegotiate

Gulf News

Dubai: Historically, since the UAE has not had any forms of taxation, businesses are struggling to introduce language in their service contracts for the upcoming introduction of the value-added tax on January 1.

The contracts being issued by many companies largely fail to address the problems that could arise from the introduction of tax, explained Adam Powell, a Senior Associate and Head of the Corporate Commercial Practice at legal firm Al Tamimi & Company.

This means that standard form agreements are being issued regularly without any contractual VAT protections for the supplier and although at present no VAT is payable, many contracts will run across the implementation dates.

Contracts should clearly state whether the price is inclusive or exclusive of a value added tax.

Given that a supplier is generally responsible for the VAT, if the contract is silent on these aspects, then they may find that it is required to account to the relevant authority and it may be unable to recover the VAT from its customer, leaving the supplier short changed, Powell added.

Exclusive versus inclusive

According to Shiraz Khan, a senior tax adviser at Al Tamimi & Company, if the contract does not state that the price of rent is exclusive of VAT, the landlord will have to bear the cost of the added five per cent, as mentioned above.

“If the contract says the price is exclusive of VAT, then the tenant must pay. If the contract states that the price is inclusive of VAT, then landlord must bear it. If the contract is silent, then again the landlord has to pay,” Khan said.

A silent contract means that it makes no mention of VAT.

“If the contract is silent … then contractually he can’t pass it on,” Khan added.

Advice to companies

Lawyers are currently advising their clients on who to deal with the new changes.

“We are currently advising businesses that for future contracts, they should introduce a VAT clause and a change in law clause, and for old contracts they need to check and see if there is a VAT clause,” said Nadine Bassil, a partner in the tax practice at auditor PwC.

If, however, the contract is inclusive, or silent on the issues, then the service provider should seek to “renegotiate it, or put in a provision, or communicate to counterpart that VAT is coming,” in order to avoid having to bear any tax payable on the 2018 side of the contract, Bassil added.

Consumer contracts

To further complicate matters, this isn’t the case with all contracts, especially business to consumer agreements.

Take a mobile phone contract with Du or Etisalat, for example.

Even if they don’t expressly mention VAT in the contract, unfortunately that doesn’t mean the individual who has just signed up to a new 12 month contract, with mountains of data and minutes, will avoid paying an additional 5 per cent on top of his or her bill next year.

“In the case of a service provider such as Du, my expectation is that they will notify customers that they have change their terms and conditions unilaterally. A company like that will have the ability to amend peoples’ contracts unilaterally,” Khan said.

So, unlike a commercial property owner who is renting our his or her space to other companies, large scale corporations that deal with thousands, if not millions, of contracts every year, will have the ability to make sweeping changes to the conditions of said contracts, simply to make doing business more efficient.

Consumers will not have to be involved in this process at all, however, as there won’t be any need to sign a new contract.

Starting from 2018, everyone who has a mobile phone contract, or a television package, or an internet package, will simply find it five per cent more expensive.

Transition

There are many nuances of this transitional period, experts say, including when a service is completed, when an invoice is raised, and whether the contract is considered continual or periodic all impacting the status of a commercial contract.

“There are some cases where a service contract will be fully taxable after VAT, other ones will not be taxable, and others will be pro-rated depending on the nature of the contract and certain other elements,” Bassil said.

 

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