The introduction of VAT in the UAE has made it necessary for businesses to understand the finer points of compliance expected from them under the VAT regulatory regime. One of the key aspects being Date of Supply, which is usually not paid sufficient attention to, by the businesses. The priority is to buy or sell and not necessarily, get the related documentation by way of Invoices and Bills in order. So when the return time comes, there is an unnecessary follow-up to be undertaken to get the invoices and bills, at this point, the invoices and bills are not usually dated in line with the VAT requirements. This post will explain the implications in detail.
The date of supply is a very important concept to be well versed with to ensure full compliance with the VAT guidelines in place.
DATE OF SUPPLY
Date of supply is the date or point where VAT becomes chargeable, the tax period within which this date falls requires the tax to be reflected in the tax return and paid as part of the tax liability within 28 days of the end of the tax period.
Why is it Important
Clarity on the concept of Date of Supply will help you avoid having to pay the VAT from your funds, instead of from customer receipts.
Date of supply for goods:
The identification of the date of supply for goods and services are distinct to an extent. The key considerations for identifying the date of supply for goods are”
- When goods are transferred to the buyer – The date of transfer can be treated as date of supply
- When ownership in the goods is transferred to the buyer- the date of transfer can be treated as the date of supply
- When possession is transferred to the buyer – the date of transfer can be treated as the date of supply
- When payment is received for the supply – the payment receipt date can be treated as the date of supply
- When Tax Invoice is issued for the supply – the date of issuance of the tax invoice can be treated as the date of supply
Whichever event from any of the above 5 occurring FIRST will be considered as the date of supply. Also to be noted, in case, of any of the events from one to 4 above occurring first, the Tax Invoice is required to be issued within 14 days of the date of occurrence of the event.
Date of Supply for Services:
As you would have understood by now, the absence of physical goods does have a direct impact on the date of supply. Hence for identifying the date of supply for services the following to be considered:
- Completion of the service – The date of supply can be the date the service was fully delivered.
- Receipt of Payment – The date of receipt of the payment can be treated as the date of supply
- Issuance of Tax Invoice – The date of the Tax Invoice can be treated as the date of supply.
Whichever event from any of the above 3 occurring FIRST will be considered as the date of supply. Also to be noted, in case, of any of the events in one and two above, occurring first, the Tax Invoice is required to be issued within 14 days of the date of occurrence of the event.
Date of Invoice:
The date incorporated as the Invoice date, therefore, is critical as in case of a Tax Audit, the justification of the Tax Invoice date should stand the above requirements with sufficient documentary evidence.
How does it impact business cash flows:
The above guidelines are pretty straight forward, however, in actual business dealings, businesses tend to misinterpret them and get into a scenario where the tax liability is crystallized and payment to be done from business funds instead of customer receipts.
For e.g. brokerage services. The service is complete when the terms of sale have been completed by the buyer with the seller. This requires several actions to be undertaken by both and also government bodies to transfer the ownership. This could take anywhere between a week to months. In such a scenario, if the brokerage firm raises a Tax Invoice, when the deal is agreed to, instead of when the deal is completed and commission receivable, then the firm will be liable for the VAT if a tax period ends and tax is payable between the deal agreement date and the deal completion date.
The solution for this is to provide the customers with a Proforma Invoice or Indicative Invoice at the deal agreement stage and issue the Tax Invoice when the service is completed i.e. deal completed and payment receivable.
How does it impact your VAT compliance status?
The date on the Invoice as mentioned earlier is critical, it needs to be adequately justified on the basis of VAT guidelines on the date of supply. Incorrect date of supply has a direct impact on the level of tax liability of the business at any given point of time. For e.g. If a Tax Invoice has not been collected at a point in time within 14 days of any of the other conditions being met, and unfortunately, a tax period closing occurs. Then technically, the VAT input credit cannot be availed for the same in good order as the transaction for the period is closed.
Another classic example is accounting for the right level of VAT along with the accurate date of supply is Rent Invoices for commercial properties. Usually, rent payments are by way of multiple payments over the rental contract tenor. The ideal scenario is to collect the VAT for each of the installment amounts at the point of the payment and issue a Tax Invoice for the installment amount received. However, some realtors issue the full tax invoice, with full VAT at the start of the contract. In such cases, the full VAT amount will be required to be collected upfront by the realtor to avoid paying the same out of their own funds.
The above information applies to all businesses, be it contracting, marketing or any business, It is more useful for businesses where there is a time gap between deal agreement and deal completion.
Overture Accounting and Bookkeeping LLC provides comprehensive VAT compliant accounting and bookkeeping services with complementary VAT consultancy and support services. Details of our accounting offers are available here.