REVERSE CHARGE -VAT UAE

Reverse charge mechanism has been prescribed by VAT decree law (Article 48) and also by VAT Executive Regulations Article 48. Situations governing use of the reverse charge are mentioned in aforementioned articles. Most commonly its import of supplies. However it must be remembered that recipient is always a taxable person and only than reverse charge can operate. The problems arise only when the recipient being a taxable person is making partially exempt supplies.

Reverse charge is effectively shifting the responsibility of accounting for VAT from supplier to receiver. It’s based on reclaim of input to the extent of use in taxable supplies, balance becomes payables.

Fully Taxable Supplies- Recipient

A person making fully taxable supplies will recognise both input and output tax on considered supplies for same amount and these will nullify each other in the VAT return and also in the accounting records.

Example 1: ABC Company receives services from abroad (notwithstanding the current transitional provisions for GCC import / export) for value of AED 1000. It should be accounted as below:

Zero Rated Recipient

There would be no impact on recipient making 100% zero rated supplies a (s)he is still considered making 100% taxable supplies. SO the above illustration will work for him/her.

Exempt Recipient

If the recipient is making fully exempt supplies, he cannot be registered for VAT and hence this scenario cannot be created. However if a registered person is making mixed supplies i.e. partially taxable supplies and partially exempt or not for the purpose of business, then the reclaim of input will be to the extent of taxable supply (Article 54 Decree Law). The balance input will be lost while full output would remain recognized and hence a tax payment to FTA.

Example 2: Continuing from previous example, we assume all information same, but the taxable supplies are only 40% of taxable persons total supplies. The remaining are either exempt or not in business use. The accounting would be as below:

At year end we need to reassess the taxable use under article 55 of executive regulations and if the taxable use percentage is different there may be recoverable or payable VAT as result of calculations. Suppose at year end the total taxable use comes to 75%, so the recoverable VAT of (1000*5%*70%) = 35- paid 20=15 excess paid to FTA.

 Conclusion.

The reverse charge is beneficial for taxpayer as it shifts the point of tax payment from point of tax incidence to point of making taxable supply, hence a cash flow benefit. Please note the methodology shown in this article is slightly different from what has been shown in VAT Manual by GAZT, but the net impact is same.

(Disclaimer: The article does not purports to be a legal advice, author cannot be held liable in any manner)