There will be two VAT rates applicable within the UAE:
- the standard rate of VAT – 5%; and
- the zero rate of VAT – 0%.
In addition, a certain category of supplies will be “exempt” from VAT.
Although VAT is not accounted for in respect of both zero-rated and exempt supplies, there is an important distinction between the two.
Zero-rated supplies
VAT is not accounted for on zero-rated supplies (since the applicable rate is 0%), but such supplies are still treated as “taxable supplies” in all other respects. As a result, the person making the supply has the right to recover the VAT incurred on their own business expenditure in the same way as they would if they made standard-rated supplies.
Zero-rated supplies
Zero-rated supplies are taxable supplies of goods or services which are subject to VAT at 0%. The following broad categories of supplies are zero-rated:
- A direct or indirect export of goods or services to outside the GCC Implementing States.
- International transport of passengers and goods which starts or ends in the UAE or passes through the UAE’s territory, including services related to such transport.
- Goods and services consumed or used during the international transportation of goods or passengers.
- Air, sea and land means of transport intended for the transportation of passengers or goods, and goods and services supplied for the purpose of the operation, repair, maintenance or conversion of these means of transport.
- Aircraft or vessels designated for rescue and assistance by air or sea.
- Certain investment precious metals.
- The first supply of a newly constructed or converted residential building within 3 years of the completion of the construction or conversion.
- The first supply of a building specifically designed to be used by charities.
- Crude oil and natural gas.
- Educational services and related goods and services for nurseries, preschool, and elementary education; and higher educational institutions owned or funded by Federal or local Government
- Preventive and basic healthcare services and related goods and services.
As mentioned above, although VAT charged on a zero-rated supply is nil, the supply is still treated as a taxable supply in all other respects – including the right of the person making the supply to recover the VAT on expenses incurred in making the zero-rated supply.
Exempt supplies
Similar to zero-rated supplies, no VAT is collected in respect of exempt supplies. However, since those supplies are not “taxable supplies”, the supplier cannot normally recover any of the VAT on expenses incurred in making exempt supplies.
Incurred VAT, therefore, will represent a cost to businesses involved in making supplies which are wholly or partly exempt from the VAT.
The following supplies are exempt from VAT:
- Financial services which are not conducted for an explicit fee, discount,
commission, rebate or similar type of consideration, including life insurance and
reinsurance of life insurance. - Residential buildings, other than the residential buildings which are specifically
zero-rated. - Bare land.
- Local passenger transport.
Exempt supplies are not taxable supplies for VAT purposes. Therefore, VAT is not charged on exempt supplies and the supplier is prevented from recovering any VAT on expenses incurred in making those exempt supplies.
Adding VAT to goods and services
VAT is charged on the value of goods and services.
When adding VAT to the price of goods or services, the business should multiply the amount by the applicable VAT rate (e.g. 5%).
If the price already includes VAT, divide the price by 21 (for the 5% VAT rate) to find out the VAT amount. Subtracting this amount from the VAT-inclusive price, will give the VAT-exclusive value of the supply.