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Who covers the VAT?

  • United Kingdom
  • Tax planning and consultancy

05-12-2017

If contracts entered into before 1 January 2018 are silent on VAT, it may be possible for the supplier to increase prices to cover VAT but suppliers need to take action before the end of 2017 to be able to take advantage of this.

It’s been hard to avoid talk of the introduction of VAT on 1 January 2018 if you’re at all involved in business in the UAE. Whilst companies with taxable turnovers of more than AED 375,000 rush to prepare their internal processes for VAT, thoughts are also turning to the position with existing contracts. The VAT Regulations have now been issued and these give a clearer picture on the intended position.

The limited tax regime in the UAE has meant that companies historically haven’t given much thought to the tax provisions in their commercial contracts, particularly where the contract is between two UAE entities. If VAT is payable on the supply of goods or services, who bears the brunt of this – customer or supplier?

The first step is to look at whether this is covered in the contract. Generally, the price for a contract has to be inclusive of VAT. An exception is where the customer is registered for VAT (or the supplier are exporting the goods or services). There the supplier can specify that the price is exclusive of VAT but the supplier needs to ensure this is clear. There are some other exceptions that relate to imports for a customer’s own use and the oil and gas sector.

Contracts based on international forms or entered into after the announcements on the introduction of VAT may specify how VAT is to be dealt with. Generally if a position is taken in business to business contracts, VAT will be payable on top of the quoted prices (but be careful when you’re dealing with SMEs who may fall below the registration thresholds). You do need to check on a case by case basis as this can vary depending on sector and the extent to which the provisions were negotiated.

But what if the contract is silent? The law contains transitional arrangements covering this. Where a contract is concluded before the implementation of VAT, does not contain VAT provisions and part or all of the supply is after VAT comes in, the price in the contract is inclusive of VAT unless the customer is (a) registered for VAT and (b) where the customer has the right to recover VAT charged on the supply. This means that for some business-to-business contracts if the contract doesn’t deal with the issue the supplier will be able to increase prices to cover VAT.

Suppliers must take action before the end of year – to be able to charge VAT on top of the agreed price the supplier must ask the customer to confirm whether it (a) is or expects to be registered for VAT from 1 January 2018; and (b) the extent to which it expects to be able to recover the VAT incurred on the supply.

This won’t apply to all contracts – sometimes the customer won’t be able to recover the VAT incurred. A key example would be customers in the financial services industry where the supplies they in turn make may be exempt from VAT or customers in the residential property sector. If the customer won’t be able to recover VAT, the price will be considered to include VAT which the supplier will need to pay to the authorities out of the pre-agreed price. This means VAT will directly eat into the supplier’s profit margin. VAT exempt suppliers will also need to think about whether or not they can pass on their irrecoverable VAT costs post 1 January to their customers.

It doesn’t stop there though. Even if the supplier isn’t able to increase prices to cover VAT (for example because the customer isn’t registered for VAT or because the customer won’t be able to recover VAT) there may be actions parties can take if they are facing pressure due to VAT. As before, the first thing to do is to look at the contract – in particular the termination provisions and any provisions allowing for increases in prices. If the contract does give an option for either party to terminate or the supplier to increase prices it could be back to the negotiating table again as parties evaluate whether a contract is worthwhile continuing with or if there are alternative options in the market.

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