Impact of VAT on legal firms in the UAE
According to Article 3 standard rate of 5% will be levied on the supply of goods and services as well as importations. Certain items are kept under category of zero-rated on which 0% will be charged which means no VAT will be applied but the VAT incurred on purchases may be deducted. There are certain areas such as healthcare and education which are kept exempt from VAT, where VAT will not apply at all and the privilege of input VAT credit on related VAT on purchases may not be deducted, and VAT would therefore be a cost to such businesses. All the Supplies of goods and services which are performed between a VAT-registered person in one Member State to a VAT-registered person in another are subject to the reverse charge mechanism which means the responsibility for a VAT transaction will be shifted from the seller to the buyer, the buyer will report the input as well as output VAT in their return.
All those businesses that supplies services and are subject to the VAT Regulations will have to charge VAT to its customers. However, such business if not falls under the exempt category would be entitled to reclaim VAT on costs. Many businesses are taking it seriously as they don’t want any hindrance in their working due to this new law so to avoid it they have already initiated or completed assessment of the impact that VAT, they are also revising their structures and techniques.The impact of VAT on international law firms should not be understated as VAT is definitely going to affect law firms as well.UAE set out various regulations and rules regarding VAT and if law firms in the UAE fall within that category, then such firms will also need to charge VAT on the fees and costs charged to clients.The VAT input tax credit mechanism is made available only to firms that are registered for VAT within the GCC. As a result if a law firm is not registered for VAT, it will not be able to reclaim any input VAT credit and will instead have to expense the VAT as an operating cost. The VAT registration threshold is “nil”, if law firms provide taxable supplies within a GCC Member State.
There are certain penalties and fines that can be levied for the non-compliances:
- Non registration or failure of registration even on surpassing the VAT registration threshold
- Failure to keep the required records, books and other information
- Non-filing or Incorrect filing of a VAT return
- Late filing of a VAT return
- Tax evasion
There are some areas where legal professionals should pay special attention in context of VAT:
- New as well as existing contractual arrangements
- Framing new joint venture/M&A deals
- Formation of new companies and use of holding companies
- Asset sales versus a transfer of a going concern
- Arrangements between a limited liability company that is incorporated in the UAE
- Ownership and use of property
It is the responsibility or the basic requirement of the law firms/offices that they should consider deliberately how their VAT compliance responsibility will be managed as GCC Member States as opposed to quarterly returns which increased the risk of error in the reporting of VAT.