Value-added taxes (VATs) are mandatory to pay for businesses in various parts of the world. It is the single biggest source of revenue for a government. Around 180 countries in the world have put a VAT system in place. In the UAE, the government introduced the VAT when the year 2018 began. The purpose of the UAE government behind value-added tax implementation was to reduce the amount of reliance on revenues from sources like Oil and hydrocarbons in the coming years.
The USA did not have VAT regulations until recently. Now, the VAT rate for 2019 has been 10 percent in the US and is paid to the US government’s revenue department. The VAT rate in the UK has been a good twenty percent for the year 2019. The regulations vary place to place, but there’s one common point: the beneficiary is the government
Value Added Tax Definition:
VAT is a consumption tax on a product which a business has to pay at each stage of adding value to the raw material. It is the businesses paying this tax. But the truth is that it is the consumers paying it and the businesses are only collecting it.
VAT Registration Process:
VATs are a substitute for income tax in most countries. It is an obligation of an individual, group, or business towards the state. The process can vary in your country. Following is the process for businesses in the UAE:
The FTA website allows you to register your business for VAT very easily. You will find a VAT registration form and group registration form on the online portal. It is a very accessible process that will easily find in the eServices section of the FTA website.
2. Payment and collection
On every step of the supply chain, whether your company adds value to raw material, a finished article of goods or services, a five percent of the profit has to be paid to the government (in the case of UAE, and varies for different countries)
This article aims to provide you with a comprehensive guide on the subject of VAT with highlights of the pros and cons of value-added tax for business.
Advantages and Disadvantages of Value Added Tax for Businesses
Registering for VAT and complying with the regulations is mandatory for running in a country like UAE, US, or the UK. The due process has its advantages as well as disadvantages. Businesses that have to comply with the VAT regulations are facing them. Key advantages and disadvantages of value-added tax are elaborate below:
Pros of Value Added Tax
Countries with Value Added tax regulations have an added advantage over those with income tax regulations. The businesses will also have some advantages, which are as follows:
1. You can reclaim it after payment
Unlike other taxes, you can reclaim the VAT. Once your company has paid your liable amount of value-added taxes, you can file for a reclaim. Under the laws of the United Kingdom, a business can demand a reclaim for goods and services which they had acquired at least three years before registering the business for value-added taxes. In the UAE, you can reclaim it in the case when your output VAT is lesser than the input VAT amount.
2. Provides cash flow planning opportunity
VAT compliance requires your business to keep the records of all the accounts, taxes, and rest of the transactions straight. When these records are updated and free of any inaccuracies, your company’s administration gets a chance to make projections and analyze the cash flows thoroughly.
Careful projections are beneficial for businesses in the long run because they assist in decision making.
3. Enhances the credibility of your company
When you pay VAT, it means you are complying with the local regulations of your country. When your company is following the regulation, it means the record and accounts are transparent. This signifies that the business and its practices are credible. With credible and transparent practices in place, your customers will trust you and your company may attract investors as well.
Cons of Value Added Tax
While there are many advantages of VAT regulations for a business, there are some disadvantages as well. Those are as follows:
1. It complicates matters
Value-added tax payment and compliance require careful documentation of income, costs, and profits of the business. Secondly, you will need to keep a record of all supplies and imports, alongside the tax invoices, reports of exported goods, and taxable output supplies for at least five years.
2. Must report with accuracy
To avoid risks and penalties that may come with VAT registration, businesses need to report all the finances and VAT calculation with utmost transparency and accuracy. If you want your business to be safe from the risk of such penalties, hire professionals with VAT expertise. These professionals ensure that your business doesn’t face any penalties in the due process of VAT payment, because, If you do not report with accuracy, your company can face penalties.
3. Needs more administration
VAT requires extra effort for books and record-keeping of all the transactions and traded goods. Thus you will need to hire an additional human resource for administering all these matters. You need professionals to handle records with accuracy as well as transparency. Along with outsourcing the professionals, your company will need to devise a complete framework that supports compliance with the regulations.
4. Compromise on profits
Everyone runs their business for profits. If they have to divide their earning with someone else, no one would be willing to work hard day and night for it. VAT regulations require you to share your profit on every stage of the supply chain. With the liability to pay a fraction of your profits on every step of the way, businesses have to divide their profits with the government, which can feel too burdensome on the cash flows. It may be regressive and difficult for small or new businesses.
Why your Business Requires VAT Professional?
A VAT is a type of sales tax at the national level. Businesses, in turn, need to comply with it. They have begun to seek services of VAT consultancies to comply with the regulations introduced by the state.
If you are about to set your business up in the UAE, you will need to check the conditions of compliance. If your company is liable to pay VAT, you can hire services of the best VAT consultancy in Dubai to ensure that you do not risk facing any penalties while running a business there.
In this way, you can ensure that you do not risk facing any penalties while running a business there.
Is Value-Added Tax Scaring you Out?
Well, do not get too carried away with the cons. Focus on the pros as well. While there are disadvantages, you have read the advantages as well. You serve the government as well as your business. Since you are running your business in a country that imposes VAT regulations, you need to comply with them.
Hire professionals who can keep your cash flows balanced, your records transparent, and your practices free of fraud. When you have got all these areas covered, you can now safely practice VAT compliance without any risk of penalties.
Thus you are at a better-informed place to make your business decisions and make significant projections.