CA. Raju Menon
Chairman & Managing Partner
Morison Menon Group
In the last couple of issues of Newsletter, I had covered about VAT rollout, structure of VAT, VAT thresholds, likely impact of VAT on intra-GCC trade, exports to non-GCC countries and on inflation. In this and subsequent issues, I plan to write about the administrative aspects of VAT, importance of documentation for VAT compliance, training for employees handling VAT within organization, structuring companies under VAT regime, refund of VAT to temporary visitors to GCC and the impact of VAT on gold and silver trade in GCC countries.
Administrative aspects of VAT
At this stage it is too early to predict what would be the administrative structure that would be rolled out by the GCC countries for VAT. Just to give a fair idea to the readers, I would outline the administrative procedure to be followed by a company seeking for VAT registration in the United Kingdom
In the UK, a business entity has to be first registered for charging VAT unless their annual turnover falls below the VAT exemption threshold. Once they register for VAT they must charge VAT on their goods and services and may reclaim VAT they have paid on business related goods and services. In the UK one needs to file VAT return once every three months.
VAT has to be accounted on full value even if the entity receives goods or services instead of money or has not charged any VAT to the customer. In such case, the selling price is treated as including VAT. If the entity has charged more VAT than what it has paid, then it has to pay the difference to the government. If the entity has paid more VAT than what it has charged subsequently then it can reclaim the difference from the government.
VAT rates, record keeping and invoices
In the GCC member countries we are still not sure about VAT rates that would be implemented. However, we can be certain of zero VAT rate for certain essential goods and services.
In the UK there are three rates for VAT, the standard rate, reduced rate and zero VAT rate. Most of the goods and services fall in standard VAT rate category in the UK. Reduced rates at 5% are typically applicable for people over sixty or people with special needs for certain mobility aids. Reduced VAT rate is also applicable for domestic power and fuel. Zero VAT rate items include books and newspaper, safety helmets and few more items for children. One should note that Zero VAT rate also needs to be charged and accounted in quarterly filing of return.
In the UK business must keep VAT records for at least six years. VAT records can be on paper, electronically or as part of a software program. I shall be covering on records that need to be kept for VAT compliance in detail in subsequent issues of newsletter.
Only VAT-registered businesses can issue VAT invoices and must issue and keep valid invoices which can be in paper or electronic form. It is important to keep copies of all the sales invoices issued even if it is cancelled or produced one by mistake besides keeping all purchase invoices for items that are bought.
In the UK full VAT invoice is required for most transactions. One can also generate a modified invoice for retail supplies over £250 or a simplified invoice for retails supplies under £250. Usually VAT invoices must be issued within 30 days of the date of supply or the date of payment.
In case of international trade, there is no need to show all amounts on invoices in sterling. If VAT invoice is issued in a foreign currency or language, then total VAT payable in sterling has to be shown on VAT invoice if the supply takes place in the UK.
There are certain exceptions to issuing of VAT invoice. One need not issue a VAT invoice if invoice is only for exempt or zero-rated sales within the UK or giving goods as a gift or selling goods under a VAT second-hand margin scheme.
VAT refund to visitors visiting GCC member countries
Dubai has lots of visitors coming in from non GCC countries for shopping and leisure. When they shop in Dubai these visitors would end up paying applicable VAT on purchase of goods. We can expect GCC countries to provide relief on VAT payment to such tourist who shops in in one of the GCC countries.
If we look at VAT charged on goods and services in EU, VAT at the appropriate rate is included in the price one pays for the goods purchased. As a visitor to the EU who is returning home or going on to another non-EU country, one may be eligible to buy goods free of VAT in special shops.
In EU, a ‘visitor’ is any person who permanently or habitually lives in a country outside the EU and address as shown in passport is taken as the place of permanent or habitual residence.
In some EU countries, one may also qualify as a ‘visitor’ if you are living in an EU country for a defined period of time for a specific purpose, but your permanent home is outside the EU and you are not intending to return to the EU in the immediate future. EU citizens permanently living in non-EU countries are also eligible for the VAT refund.
VAT-free shopping involves lot of documentation and it can be taxing for a tourist to claim refund on VAT paid. As a visitor to GCC country, it may not be a simple process to do VAT-free shopping. If one looks at procedure followed by EU member states, one cannot just do VAT-free shopping. One must pay the full, VAT-inclusive price for the goods in the shop and get the VAT refunded at the airport before departure, provided one has complied with the formalities and can show the proof of export. Also in EU the goods will be eligible for VAT refund for eligible visitors only if the goods are taken out within three months of the purchase.
In the EU, one can buy VAT-free goods even if one is going to be visiting other EU countries before finally returning home, as long as one actually leaves the EU with the goods within the time limit of three months. One needs to get documents stamped by a customs officer at the point of exit of the EU–not necessary in the same EU country where the goods are bought.
In EU member states in the great majority of cases, there is an administrative charge for the service provided at the airport to get applicable VAT refund and one can get the exact amount that will be charged from the shop where the purchase is carried out.
To avoid administrative hassles over small-value items, there is a minimum value of €175 for the total purchase. The threshold applies to the total amount of goods bought in a certain shop. Normally, one cannot cumulatively add purchases in different shops to reach the threshold.
To conclude, we can expect the administrative aspects of the VAT to be established in the UAE to adopt best practices from VAT implemented elsewhere. Impact of VAT on tourists spending in the UAE and GCC countries would depend upon the ease of refund on VAT paid by such tourists. Business entities will need to have team in place that is well trained on intricacies of applicable VAT rate, zero VAT and exemptions of VAT for product and services, documentation, invoicing and regulatory filings. The existing accounting packages would require modification to take VAT into account. For companies with adequate training, processes and automation in place, I would not expect compliance to VAT would be a challenge.