Two years of VAT in the UAE and recent developments

The UAE's Federal Tax Authority (FTA) published a number of new and updated guidance documents towards the end of 2019 which will clarify the application of some of the existing rules.

The FTA intends to further develop its electronic systems for the monitoring, collection and payment of VAT throughout 2020, according to Khalid Al Bustani, the FTA's director general. Planned improvements include the recent launch of a new electronic platform to handle VAT refund payments to citizens who have built new houses.

VAT came into force in the UAE on 1 January 2018 and is charged at a rate of 5% on most supplied goods and services. Around 312,000 businesses are now UAE VAT-registered, whether individually or as part of a VAT group, according to the FTA.

New turnover declaration letter form

The FTA has published a template turnover declaration letter form on its website, which appears next to the VAT User Guide (Registrations, Amendments and De-Registrations) on the FTA VAT guidance page.

The form appears to provide a standard format to be used by businesses when stating the value of supplies undertaken in the past and estimated for the future when completing an application for VAT registration. However, the registration guidance itself has not been updated since November 2018.

Notable features of the template letter include:

• a three-year 'look back' exercise, to the start of 2017, and a one-year 'look forward', to the end of 2020, with detailed month-by-month figures required. This goes much further than the minimum required by the UAE VAT Law, which requires every taxable person to perform a 12-month 'look back' and 30 day 'look forward' exercise to determine whether they are liable to register for VAT;
• those using the letter must state the month and year in which they started undertaking taxable supplies in the UAE together with the month and year in which they exceeded the registration threshold - whether mandatory, voluntarily or immediately in the case of non-residents;
• the details contained in the letter must be validated through signature by an authorised signatory, together with attaching supporting financial documentation as evidence. This evidence is already required as part of the standard VAT registration form being used by taxpayers to date.

The template should make the registration process a bit smoother for the FTA. It provides a more structured mechanism for businesses to declare their value of supplies in the region and identify the timing of their VAT registration obligation or entitlement to register, which one would expect will speed up the VAT registration approval process.

However, businesses should be aware that the template requires values to be provided in a very clear manner on a monthly basis over a four-year period. This is quite a long period of time which gives the FTA a better opportunity to identify when a taxable person should have been first registered for VAT and therefore to identify those who have submitted late registrations and are liable for a late registration penalty of AED 20,000 (US$5,450). To date, this late registration penalty has tended to be applied across the board, with little room for mitigation. In addition, where the FTA assesses from the detail contained in this new declaration letter that a person has registered late, clearer values are available to it for calculating tax geared and time geared penalties.

Updated guidance on using a special method for input VAT apportionment

The FTA's guide to input VAT apportionment special methods (25-page / 1.1MB PDF) was originally published in December 2018, and updated on 30 December 2019.

The guide deals with the application of a 'special method' for input VAT apportionment where the standard method set out in article 55 of the UAE VAT Regulations is not viewed as the most appropriate method for the company or business in question, and the associated process of submitting the relevant application form to the FTA. The guide is quite detailed, walking taxpayers through the alternative special methods and indicating which types of businesses each may be most relevant for, including a sectoral method for larger businesses with many divisions or tax groups including many different legal entities.

The recent updates to the guide are summarised on page 16, with the main one being the addition of an appendix 3 setting out common errors by applications for special method consideration to the FTA. These include:

• setting out requests by the FTA to taxpayers in relation to the format and layout of the calculations, in order to make the FTA's review much more streamlined – for example, making sure recovery rate percentages are rounded to the nearest whole number;
• identifying areas where taxpayers are perhaps not being clear which their breakdown or description of the values being provided – for example, they now request that you clearly indicate whether expenses are wholly attributable to either exempt or taxable supplies or are wholly residual and subject to apportionment;
• clarifying some small technical points – for example, exclusion of blocked input VAT from the standard method calculations, exclusion of communal areas such as lobbies and lifts when calculating the floor space available for commercial or residential use.

The FTA emphasises that any deviation in the calculations of the 'standard method' - which needs to be submitted to the FTA when applying for approval for the application of a special method – and the actual VAT returns filed to date must be explained. This indicates that the FTA expects a reconciliation to be performed and any "errors" identified in previously-filed returns as a result of carrying out the apportionment calculation should be corrected by means of the self-correction or voluntary disclosure procedures set out within the UAE VAT legislation and FTA guidance notes.

Input VAT apportionment for businesses or VAT groups which have both taxable and exempt activities is a challenge in most global VAT regimes, and the UAE is no different. It is an area of the VAT compliance cycle which can be quite tedious and easily open to manual error. Therefore, businesses should ensure that they have the necessary level of VAT technical expertise together with associated internal procedures and controls to mitigate the risk of error and the associated application of penalties.

The addition of a common errors section to this guide indicates that the FTA is giving each application for special method its full attention, together with reviewing the application of the standard method during normal audit procedures to ensure taxpayers are being fully compliant with the apportionment rules. Therefore, businesses should be prepared to have their apportionment methodology and associated calculations checked by the authorities in the near future, if not already done so. An internal 'health check' of the approach taken and supporting calculations in advance of any FTA enquiry will give the business the opportunity to correct any errors voluntarily, and to potentially mitigate any penalties.

New guidance on VAT refunds for new residences

Article 5 of the UAE VAT Law allows the FTA to put VAT refund mechanisms in place in certain special scenarios. These include allowing UAE nationals the ability to obtain a refund of VAT incurred on goods and services related to the construction of a new residence that is not part of that person's business activities. The UAE VAT regulations go on to explain that where an individual owns or acquires land in the UAE on which they build, or commission the construction of, their own residence, they are entitled to make a claim to the FTA for repayment of any tax on the expenses of constructing the residence.

The new FTA guide (13-page / 448KB PDF) sets out the process that a UAE national must go through in order to claim such a VAT refund in much more detail, including details of the newly launched automated form available within the FTA e-Services Portal.

For taxable persons already registered with the FTA for VAT purposes, a new tab for 'special refunds' will simply pop up on their dashboard in the FTA e-Services Portal. The procedures for drafting, saving and submitting are fairly self-explanatory. Those who are not taxable persons, and who therefore are not already registered with the FTA for tax purposes, will need to register for an e-Services account, which will give them access to the New Residences VAT Refund Form. However, they will not need to register for VAT purposes.

The user guide also sets out the various pieces of information and documentation that will be required in order to submit the form and for it to be approved. These include details relating to the property itself, construction permissions and evidence of completion; calculations and evidence of associated costs; and details of any government bodies which have fully or partially funded the build.

Overall, the refund procedure is similar to other refund procedures available in the region. Taken together with the Tourist Refund Scheme, Expo 2020 Refund Scheme, Exhibition and Conference Refund Scheme and Foreign Business Visitor Refund Scheme, it shows that the Ministry of Finance and rulers of the UAE want to ensure that the UAE VAT regime allows for and promotes the retention of local UAE families, tourism and the UAE as a prime event location and a place to do business in a cost friendly manner, while continuing to generate a diversified and stable revenue stream for the government of each emirate.

Given the success of the UAE's Tourist Refund Scheme, with 3.2 million electronic applications processed to date, we can expect that the New Residences VAT Refund Scheme will be similarly successful in its automation and ease and clarity of use. In his comments of 4 January, FTA director general Khalid Al Bustani promised a new electronic platform would launch in 2020, "offering tax refunds on home construction by UAE nationals through simple procedures provided in cooperation with the housing finance entities ... to provide necessary guarantees to support tax refund applications". According to Al Bustani, 1,474 applications for New Residences VAT Refunds worth a combined AED 84.07m were processed, assessed and approved in 2019. With the new guide and electronic process in place, these numbers can only increase.

Updated guidance on clarification requests

The FTA's user guide on clarification requests (12-page / 525KB PDF) was originally published in June 2018, updated in July 2019 and was updated again at the end of November 2019.

The only difference in this version of the guide is in relation to the timing of the FTA's response to any clarification request submitted. In addition to the 45 business day response time, the FTA has indicated that it may require a further 45 business days to respond in "very complex" cases, including those in which "the FTA is required to consult other non-tax legislation, review contractual or other factual information etc.".

Joanne Clarke is a Dubai-based tax expert at Pinsent Masons, the law firm behind Out-Law.