How does VAT work in the UAE for a new business? A first-year explainer

The Ministry of Finance confirms that VAT was introduced across the UAE on 1 January 2018 at a standard rate of 5%. VAT is charged at each stage of the supply chain, but registered businesses recover the VAT they pay on costs used for taxable supplies. In the end, the tax is borne by the final consumer.

Two terms matter. Output tax is the VAT you charge on your sales. Input tax is the VAT you pay on purchases and expenses. Each tax period you report both on your VAT return and pay the difference, or claim it back if input tax is higher.

Say a design studio in Dubai invoices a client AED 20,000 for a branding project. It adds 5% VAT, so the tax invoice shows AED 20,000 plus AED 1,000 VAT, AED 21,000 in total. In the same quarter the studio buys a computer for AED 6,000 plus AED 300 VAT and pays office rent of AED 12,000 plus AED 600 VAT on a commercial unit.

Output tax is AED 1,000. Recoverable input tax is AED 900. The studio pays AED 100 to the FTA for that quarter, assuming every document is a valid tax invoice and none of the costs is in a blocked category. The studio's own profit is unaffected by the VAT; it simply passes through.

Not every new business needs to register. According to the FTA, registration is mandatory when taxable supplies and imports exceeded AED 375,000 over the previous 12 months, or are expected to exceed that amount within the next 30 days. Voluntary registration is possible when supplies and imports, or taxable expenses, exceed AED 187,500 on the same tests.

Track this from day one. A new contracting company that wins a AED 500,000 job in its second month may cross the threshold on the strength of that one contract. Our post on when to register covers the timing questions in more detail.

The Ministry of Finance groups supplies into a few treatments. Getting the label right on each sales line is the main job of your bookkeeping.

• Standard-rated at 5%: most goods and services sold in the UAE.
• Zero-rated: for example, exports of goods and services outside the GCC, international transport, certain investment precious metals, the first supply of new residential property within three years of completion, and certain education and healthcare.
• Exempt: for example, most supplies of residential property after the first supply. You charge no VAT, but you cannot recover input tax on related costs.
• Out of scope: transactions that are not supplies for VAT purposes at all.

Once registered, you file a VAT return for each tax period on EmaraTax. The FTA states that returns and payments are due within 28 days from the end of the tax period. Most small businesses are assigned quarterly periods, but your registration certificate tells you which periods apply to you.

You must also issue proper tax invoices, keep records and charge VAT on sales from your registration date. New owners often forget the last point and send invoices without VAT in the first weeks after registering, which then have to be corrected.

From the start, record the VAT treatment of every sale and purchase line, and keep every tax invoice with the entry. In HelloBooks, the AI reads supplier bills in Arabic or English, picks out the TRN and VAT amount and suggests the treatment for each line. Sales invoices carry the VAT treatment you choose per line, and the VAT 201 draft builds itself from the ledger for you or your accountant to review and file.

If your business has unusual VAT situations, such as a mix of exempt and taxable sales, ask a tax agent early. We can configure your chart of accounts and invoice layouts to match; contact us through /book-a-demo.