A Guide to Calculating VAT in the UAE

The United Arab Emirates (UAE) is a global business hub, attracting entrepreneurs and investors with its tax-efficient and business-friendly environment. However, understanding Value Added Tax (VAT) is crucial for operating legally and efficiently. Since its introduction in 2018, VAT has become an essential part of doing business in the UAE and knowing how to calculate VAT correctly can help you stay compliant, avoid penalties, and optimize cash flow. 

In this Remitly guide, we’ll break down VAT calculations, provide practical examples, and share best practices to help you manage VAT efficiently.

Why understanding VAT is important

If you’re starting a business in the UAE, it’s essential to understand the various steps involved, including applying for a business license and complying with tax regulations. VAT registration is a crucial step. VAT is applied at every stage of the supply chain, with businesses reclaiming input VAT (tax paid on purchases) against the output VAT tax collected on sales.

Proper management of VAT can help you reduce your business’s overall tax burden and ensure smoother operations.

Benefits of proper VAT management

• Stay compliant with government regulations
• Avoid financial penalties by adhering to tax laws
• Maintain accurate financial records for efficient operations
• Improve cash flow by reclaiming input VAT

Overview of VAT in the UAE

The UAE introduced VAT on January 1, 2018, at a standard rate of 5% as a new source of income for the government. VAT helps fund essential government public services while reducing its reliance on oil as a source of revenue.

VAT is applied to most goods and services, including food, commercial buildings and hotels, but there are certain exemptions and zero-rated supplies. VAT registration is mandatory for businesses that exceed a certain revenue threshold, and registered businesses are required to collect VAT from their customers and pay it to the Federal Tax Authority (FTA).

VAT registration requirements

VAT registration requirements are dependent on annual revenue:

• Mandatory registration: Businesses with revenue exceeding AED 375,000 must register for VAT.
• Voluntary registration: Businesses with revenue between AED 187,500 and AED 375,000 can opt to register.
• Exempt businesses: Businesses earning less than AED 187,500 are not required to register.

Common VAT scenarios

Businesses have different VAT rates depending on their specific goods, services, or exemptions. Below are the three most common scenarios:

1. Standard-rated (5%): Applies to most goods and services.
2. Zero-rated (0%): Includes education services, healthcare products, international transportation, and non-GCC exports. Even though VAT is 0%, it must still be reported.
3. Exempt: Includes residential properties, public transportation services, undeveloped lands, life insurance, and certain financial services. VAT is not charged on these items. 

How to calculate VAT in the UAE

Calculating VAT in the UAE uses this formula: VAT Payable = Output VAT – Input VAT.

• Output VAT: The tax a VAT-registered business charges on its sales of goods or services
• Input VAT: The tax a business pays on eligible purchases, like raw materials or goods
• VAT Payable: If Output VAT is greater than Input VAT, the difference is paid to the FTA
• VAT Refundable: If Input VAT is greater than Output VAT, the difference is refundable (no VAT is due)

How VAT works in the supply chain

To understand how businesses charge VAT on their sales while reclaiming VAT on their purchases, let’s look at an example of a furniture manufacturer selling a dining table to a retailer.

1. Furniture Manufacturer: Sells a dining table for AED 2,000 and charges AED 100 VAT, paying this amount to the government.
2. Retailer: Buys the table for AED 3,000, collecting AED 150 VAT from the consumer, and deducts the AED 100 VAT already paid to the manufacturer. The retailer owes AED 50 VAT to the government.
3. Consumer: Pays AED 3,150, which includes the full VAT of AED 150, as they are the final buyer.

Stage	Sales Price	Output VAT (5%)	Input VAT (Deducted)	Net VAT Payable
Furniture Manufacturer	2,000 AED	100 AED	0 AED	100 AED
Retailer	3,000 AED	150 AED	100 AED	50 AED
End Consumer	3,000 AED	150 AED	–	150 AED

 

Step-by-step VAT calculation & examples

Now that we’ve covered how VAT is applied throughout the supply chain, here’s how to calculate it for individual transactions:

1. Identify the net price of the product or service
2. Multiply the net price by 5% (the standard VAT rate in the UAE)
3. Add the VAT amount to the net price to get the total price, including VAT

Example 1: Calculating VAT on a sale

Formula: Total price = net price + VAT

• Net price: AED 1,000
• VAT (5%): AED 1,000 x 5% = AED 50
• Total price: AED 1,000 + AED 50 = AED 1,050

Example 2: Calculating VAT on the total amount

Formula: VAT = Total amount / (1 + VAT rate) – Net price

• Total amount: AED 1,050
• Net price: AED 1,050 / 1.05 = AED 1,000
• VAT: AED 1,050 – AED 1,000 – AED 50

VAT calculation scenarios

VAT varies depending on the type of goods or services being sold. Here are the three most common scenarios: 

Scenario 1: Selling standard-rated goods

• Product price: AED 1,000
• VAT (5%): AED 1,000 x 5% = AED 50
• Total VAT-inclusive price: AED 1,050

Scenario 2: Providing a zero-rated service

• Service value: AED 5,000
• VAT (0%): AED 5,000 x 0% = AED 0
• Total price: AED 5,000

Scenario 3: Selling mixed services (standard-rated and exempt)

• Service: AED 1,000 exempt and AED 1,000 standard-rated
• VAT (0%): AED 1,000 x 0% = AED 0
• VAT (5%): AED 1,000 x 5% = AED 50
• Total price: AED 2,050

The role of VAT in the UAE economy  

VAT has been instrumental in enhancing the UAE’s economy by:

• Diversifying revenue sources: With the introduction of VAT, the UAE reduced its heavy reliance on oil exports. This helped stabilize the national budget by making the UAE’s finances less vulnerable to global oil market dynamics.
• Funding public services: VAT revenues are pivotal in financing high-quality public services, including healthcare, education, transportation, and social welfare programs. This investment has improved the quality of life and enhanced the UAE’s appeal as a business-friendly environment.
• Enhancing economic stability: VAT helped create a more predictable revenue stream for the government, helping to future-proof the nation against unforeseen economic fluctuations. 
• Supporting sustainable development: Sustainability is a central focus for the UAE, and VAT revenue has been invested in eco-friendly initiatives, green technology and renewable energy projects. 
• Generates revenue: As of October 2021, the total VAT revenue collected exceeded AED 95.4 billion, demonstrating the scale of VAT’s impact and importance as a stable source of income.

Common mistakes to avoid in VAT calculations

• Incorrect application of VAT rates: Ensure you apply the correct VAT rate to avoid underpaying or overpaying VAT.
• Misclassification of supplies: Accurately distinguish between standard-rated, zero-rated, or exempt supplies. It’s always worth double-checking guidelines to avoid misclassification.
• Failure to issue proper VAT invoices: Always issue invoices with accurate VAT details, including VAT Registration Number (TRN) numbers and breakdowns of tax amounts.
• Not maintaining records: Keep detailed records of all transactions to support VAT calculations and claims for at least five years.

Tools for accurate VAT calculation  

Online VAT calculators can simplify the process, reduce errors and save you time. These tools may be particularly useful to you if your business handles large transactions and complex tax scenarios. By automating your business’ VAT calculations, you can ensure compliance and accuracy in your tax reporting.

There are several effective online tools for simplifying VAT calculations in the UAE. A few options are:

• N R Doshi and Partners: A valuable online tool that provides fast and accurate VAT calculations. 
• Zoho Books: A reliable accounting tool that automates VAT calculations, reporting, and filing.
• TallyPrime: A widely used accounting software with integrated VAT compliance features.
• QuickBooks: A cloud-based accounting solution offering automated VAT calculations and reporting.
• Odoo Accounting: A comprehensive financial management tool with built-in VAT calculations and reporting functions.

Advantages of using a VAT calculator

• Quick and accurate calculations across multiple transactions
• Extracts VAT from gross prices efficiently
• Generates prices with or without tax
• Reduces manual calculation errors

Importance of VAT registration and returns

Staying compliant with VAT regulations helps you avoid penalties and ensure smooth financial operations for your business.

• Legal compliance: The UAE FTA mandates businesses with taxable annual revenue exceeding AED 375,000 to register for VAT.

• Avoid late penalties: The fee for late registration is AED 10,000, while filing your VAT return late results in an AED 1,000 fee for first-time offenders, and an AED 2,000 fee for subsequent late filings.

• Claim input VAT: Businesses can recover input VAT on purchases and expenses, reducing their overhead costs. 

• Build credibility and market trust: A VAT-registered business is viewed as being professional and trustworthy, especially when dealing with large corporations.
• Smooth international trade: VAT registration is required for import/export business, as customs authorities require a TRN to process shipments. 

Best practices for maintaining VAT compliance in the UAE 

By following the best practices below, you can simplify your business’s VAT return process and avoid penalties from the FTA.

1. Maintain accurate financial records: Keeping detailed records of financial transactions, including invoices, receipts, and tax reports, ensures smooth VAT filing and protects your business from potential audits and penalties.
2. File VAT returns on time: VAT returns must be filed quarterly or monthly, depending on the business’s revenue. If you fail to submit your return on time, you may receive a penalty.
3. Understand VAT categories: You must ensure you are accurately classifying your business as standard-rated, zero-rated, or exempt. Classifying your business incorrectly can lead to filing your VAT return incorrectly. 
4. Implement reliable accounting software: Using VAT-compliant software can streamline your VAT calculations, reporting, and filing, helping to reduce errors and ensure compliance.
5. Stay updated on VAT regulations: You should stay aware of any changes to the UAE’s tax laws and adjust your process to maintain compliance.
6. Seek professional assistance: You should consider consulting tax experts to help your business navigate complex tax laws and VAT regulations to ensure compliance with the FTA.

FAQs

What is VAT?

VAT (value-added tax) is an indirect tax imposed on most goods and services in the UAE. VAT is applied at each stage of the supply chain, but businesses collect on behalf of the government. VAT is then added to the final price, so it is ultimately the customer who pays VAT.

Which sectors are zero-rated for VAT?

VAT is applied at 0% for the following sectors: education services, healthcare products, international transportation, non-GCC exports, natural gas and crude oil supplies, and investment in precious metals. 

Which sectors are exempt from VAT?

VAT is not applied on the following sectors: residential properties, public transportation services, undeveloped lands, life insurance, and select financial services.