VAT covers every space, so shine a bright light

VAT, like sand, gets everywhere. Every time you think you’ve dealt with the last of it, more appears. It gets into the smallest of places, the places you never think about. While these nooks and crannies only gently tease the normal equilibrium of things, VAT instead generates a gnawing in your mind that something is amiss.

Today, I want to shine a light into the irregular places you had either forgotten about or never knew existed. These are The VAT Tales.

The Good Parents

Breakfasting recently with a young entrepreneur who provides services and occasionally goods, I advised her on aspects of VAT as might apply to her situation.

She was unsure whether she would hit the mandatory registration threshold, but I pointed out that some businesses may prefer to contract only with VAT registered entities rather than risk additional cost entering the supply chain. She was, understandably, reluctant to on-board bureaucracy.

Her parents, one of whom is a professional practitioner, have been supportive. So supportive, that their daughter has her visa and trades using that professional practitioner Trade Licence. This natural nurturing is about to create one more fundamental issue to the one they didn’t know they already had.

Firstly, my friend cannot look at her turnover in isolation when deciding whether to register for VAT. Between parent and offspring, they will definitely be legally required to register as the total revenue relating to the Trade Licence is in play. Not registering will result in a fine.

Secondly, Trade Licences are issued for trading in specific activities. In some cases the activities of the two will be very different. While a certain latitude might exist, it will be blindingly obvious if the daughter’s business is not properly registered. This could result in being prosecuted.

In this situation we cross paths with my favourite VAT anomaly. Yes, there is black comedy to be had in tax. Anything sold that should have VAT applied to it, whether or not it is illegal to sell that good or service, must levy VAT.

Let’s take a walk past that shady person standing on a street flashing mobile phones at you. Well dressed, let’s assume he sells goods worth Dh400,000 a year. With no trade licence; this is a breach of business registration laws and unregistered for VAT; a breach of Federal Tax Authority [FTA] law, this person on arrest potentially faces separate fines and jail time for carrying out the same activity.

The 13th century Magna Carta outlawed double jeopardy; being arraigned on the same charge twice. What I’m not sure it covered was being accused of breaking two different laws represented by two separate arms of Government.

The Tenant in the Dark

Over an adequate pot of tea, I looked at the circumstances relating to a single retail location in a second-tier mall. Asking if the landlord had written to each tenant detailing their approach to VAT and how it would affect their financial relationship, the response was: “Not so much as a note; written or whistled.”

“What does your rental agreement say about tax?”, I asked. Like many tenants, only the elements covering the term and rental and auxiliary changes had been read.

This tenant had been feeling mistakenly empowered by the lack of communication. The FTA holds each entity responsible for their element of VAT as it flows through the value chain. Entities cannot rely on the non-compliance of their large suppliers and/or customers as a crutch for delaying their own VAT solution.

I don’t like to use the word negligence but in this case it would appear that the landlord is either completely unprepared and is putting their organisation at financial risk or, by bureaucratic mishap or lethargy, hasn’t communicated that part of their solution that affects their tenants.

The latter would be morally repugnant, but not illegal. The late arrival of an amended invoice that unexpectedly incorporates VAT will affect short-term cash flow. As the charged VAT is reclaimable, the landlord might just pooh-pooh any protest raised.

A special case

The road to good intentions is littered with victims who lacked in afterthought. Expo 2020 has committed to supporting SMEs, setting aside 20 per cent of all contracts, this supporting the nascent giants of tomorrow. ­Admirable.

Expo 2020 will be treated differently for VAT, as it is a special national event, this is permissible within the GCC framework. Sensible? For SMEs that have a simple VAT interaction, their world just got a lot more complicated. These contracted SMEs will now be earning revenues that for VAT purposes are outside standard treatment. This means they will need to apportion their overhead input costs relative to differing the revenue types and all costs related to the delivery of those Expo services.

As revenue is likely to be earned unevenly over the contracted period, there is a chance that the apportioning will fluctuate over the engagement. To ensure compliance and mitigate the risk of VAT audits challenging the apportioning of costs, for each VAT reporting period the calculation result should be agreed with the FTA.

The Morlocks

Large groups can often contain legacy entities. These are typically failed ventures, those paralysed due to partnership disagreements, etc. They survive in the shadows, their life support extended annually by some bureaucrat who renews licences as per process and with no questions asked.

I recall one group company that carried out an activity not covered by that entity’s Trade Licence. This was because it originated at another, now dormant, entity. Illegal both from a DED and FTA perspective, I’m curious as to how many like this are discovered during VAT audits?

Best put those zombie entities to rest and ensure that all are trading within the confines of what’s permitted within each Trade Licence.

Epilogue

The sand in my hourglass is almost spent. Until next time, when some more VAT Tales I will present.

David Daly is a chartered accountant (CIMA) typically serving in chief financial officer or finance director roles.

business@thenational.ae

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