Understanding VAT and bookkeeping

2017 THE MARTIN-BROWER COMPANY, L.L.C. MARTIN BROWER | 1
 Aamish Nawaz ACCA, CFA

 Legal framework governing VAT in the region
 Principal of VAT
 VAT concepts
 VAT mechanics
 Input VAT deductibility
 Out of scope supplies from UAE VAT perspective
 Time of tax applicability
 VAT Bookkeeping – Input VAT
 VAT Bookkeeping – Input VAT Adjustments
 VAT Bookkeeping – Output VAT
 VAT Bookkeeping – Output VAT Adjustments
 Other transactions

GCC VAT
Agreement
UAE VAT
Law - Final
KSA VAT
Law - Final
Bahrain –
No VAT
law
Qatar – No
VAT law
Oman – No
VAT law
Kuwait –
No VAT
law
GCC VAT agreement was signed in
2016 and is a basic governing
document for VAT throughout
GCC.
KSA final VAT law is already
published along with implementing
regulations. VAT is going live from
01 January 2018.
UAE final VAT is already
published. Executive regulations
will be out in Q4 of 2017. VAT is
going live from 01 January 2018.
VAT in all other jurisdictions is
expected to be effective from 01
January 2019

 VAT is a tax which is levied on all taxable supplies of goods and services made by the taxable business during a tax period.
It is essentially borne by final consumer.
 VAT collected from sale of taxable supplies (output tax) is then passed on to the tax authorities.

Import VAT=50,000
Sale = 1,250,000
VAT = 62,500
Output Input
Sale=1.5m
VAT=75,000
Import =1,000,000
Import VAT=50,000 Net VAT (62,500-50,000) = 12,500 Net VAT (75,000-62,500) = 12,500
Total collected by FTA = 75,000

Business?
No
recovery
Taxable Mixed Exempt
No
YesYesYes
Fully
recoverable
partially
recoverable
Input tax paid

UAE Distributor
UK Manufacturer Kuwaiti customer
Delivery of
goods
Outside the scope of UAE
VAT
Outside the scope of UAE
VAT

 Date of supply determines time of tax applicability i.e. VAT period in which it must be reported in the VAT return and it varies
from transaction to transaction. Below, we will explore some of common scenarios to determine date of supply.
Scenario 1: Sales of goods without transportation i.e. transportation is to be arranged by customer:
Scenario 2: Sales of goods with transportation i.e. transportation is to be arranged by customer:
Order received
15 – Jan - 2018
Goods ready for delivery
30 – Jan - 2018
Goods picked-up
02 – Feb - 2018
payment received
02 – Apr - 2018
Invoice raised
02 – Feb - 2018
Tax point
Order received
15 – Jan - 2018
Goods ready for delivery
30 – Jan - 2018
Goods picked-up
02 – Feb - 2018
payment received
02 – Apr - 2018
Invoice raised
02 – Feb - 2018
Tax point

Scenario 3: Sales of goods with assembley and installation :
Scenario 4: Sales of goods with periodic payments by customer:
Order received
15 – Jan - 2018
components ready for delivery
30 – Jan - 2018
Components delivered
02 – Feb - 2018
Invoice raised
05 – Feb - 2018
Components assembles
and installation
completed
02 – Feb - 2018
Tax point
Contract signed
15 – Jan - 2018
25% advance received
30 – Jan - 2018
50% Goods delivered
25 – Feb - 2018
payment received
02 – Apr - 2018
25% Balance
Invoice raised
26 – Feb - 2018
Tax pointTax point
payment due date
26 – Mar - 2018

Scenario 5: Sales of services:
Scenario 6: Sales of service with advance payment by customer:
Order received
15 – Jan - 2018
Start of provision of service
30 – Jan - 2018
Service completed
02 – Feb - 2018
Invoice raised
05 – Feb - 201802 – Feb - 2018
Tax point
Contract signed
15 – Jan - 2018
50% advance received
30 – Jan - 2018
Service commenced
25 – Feb - 2018
final invoice raised
02 – Apr - 2018
Tax pointTax point
service completed
26 – Mar - 2018
Payment received

Scenario 7: Consignment stock:
Order received
15 – Jan - 2018
Invoice raised
30 – Jan - 2018
Payment received
02 – Feb - 2018
Goods taken
28 – Feb - 2018
Tax point

For the purposes of VAT records, three bookkeeping accounts must be kept
VAT on output accountVAT on input account VAT Control Account
A debit balance account
Tax paid on purchases
Shows net of output and
input account
May show debit or credit
balance
A credit balance account
Tax collected on sales

Scenario 1 – credit local purchases of goods
The Company purchased goods from local supplier for an invoice value of AED 10,000 on 15 January 2018.
Accounting entries to be passed at the time of booking GRN (inventory posting) will be:
+ INVENTORY (A) -
Creditors 9,524
- CREDITORS (L) +
Inventory 9,524
Input VAT 476
Total 10,000
+ INPUT VAT (A) -
Creditors 476
A = Asset side account
L = Liability side account
VAT amount = 10,000 x 5/105 = 476
Inventory value = 10,000 - 476 = 9,524
Kindly note that we have assumed that invoice value is inclusive of VAT

Scenario 2 – Local purchases of services
The Company availed vehicle repair services from local supplier for an invoice value of AED 2,000 on 10 January 2018.
Accounting entries to be passed at the time of booking will be:
+ Expense (A) -
Creditors 1,905
- CREDITORS (L) +
Expense 1,905
Input VAT 95
Total 2,000
+ INPUT VAT (A) -
Creditors 95
E= Expense account
VAT amount = 2,000 x 5/105 = 95
Expense amount= 2,000 - 95 = 1,905
Kindly note that we have assumed that invoice value is inclusive of VAT

Scenario 3 – Import of Goods
The Company purchased goods from overseas supplier for USD 100,000 on 15 January 2018. Exchange rate: 1USD/AED = 3.674.
+ INVENTORY (A) -
Creditors 367,400
- CREDITORS (L) +
Inventory 367,400
+ INPUT VAT (A) -
Cash 18,370
+ Cash (A) -
Input VAT 18,370
VAT on import = 367,400*5/100 = AED18,370
Assuming that VAT will be payable at the time of importation of goods
Invoice value = USD 100,000*3.674 =AED 367,400

Scenario 4 – Services from outside UAE
The Company availed marketing services from overseas suppliers for USD 10,000 on 15 January 2018. Exchange rate: 1USD/AED = 3.674
+ Marketing expense (E) -
Creditors 36,740
- CREDITORS (L) +
Marketing expense 36,740
+ INPUT VAT (A) -
Output VAT 1,837
- OUTPUT VAT (L) +
Input VAT 1,837
Reverse Charge Mechanism
Services from outside UAE will have to be
self-assessed and subject o reverse charge
mechanism
Invoice value = USD 10,000*3.674 =AED 36,740
VAT on import = 36,740*5/100 = AED 1,837

Scenario 5 – purchases of goods from KSA
The Company purchased goods from KSA supplier for AED 50,000 on 15 January 2018. Credit terms are 60 days.
+ INVENTORY (A) -
Creditors 50,000
- CREDITORS (L) +
Inventory 50,000
+ INPUT VAT (A) -
Output VAT 2,500
- OUTPUT VAT (L) +
Input VAT 2,500
Reverse Charge Mechanism
Supplier from KSA will issue zero-rated
invoice and the customer will have to self
assess VAT.
VAT on import = 36,740*5/100 = AED 1,837

Scenario 1 – credit note for local goods purchase
The Company received credit note from local suppliers for AED 1,000 on 25 January 2018. Credit terms are 60 days.
Accounting entries to be passed at the time of booking credit note will be:
+ INVENTORY (A) -
Creditors 9,524 Creditors 952
- CREDITORS (L) +
Inventory 952 Inventory 9,524
Input VAT 48 Input VAT 476
Total 1,000 Total 10,000
+ INPUT VAT (A) -
Creditors 476 Creditors 48
VAT amount = 1,000 x 5/105 = 48
Inventory value = 1,000 - 48 = 952
Kindly note that we have assumed that credit note value is inclusive of VAT

Scenario 2 – credit note for local purchase of services
The Company received credit note from local supplier for an invoice value of AED 200 on 28 January 2018.
+ Expense (A) -
Creditors 1,905 Creditors 190
- CREDITORS (L) +
Expense 190 Expense 1,905
Input VAT 10 Input VAT 95
Total 200 Total 2,000
+ INPUT VAT (A) -
Creditors 95 Creditors 10
E= Expense account
VAT amount = 200 x 5/105 = 10
Expense amount= 200-10 = 195
Kindly note that we have assumed that credit note value is inclusive of VAT

Scenario 1 –local sales
The Company sold goods to local customer for AED 500,000 on 15 January 2018. The mark-up is 10% on cost price.
Accounting entries to be passed at the time of sales will be:
+ AR (A) -
Sales 476,190
Output VAT 23,810
- SALES (I) +
AR 476,190
- OUTPUT VAT (L) +
AR 23,810
+ INVENTORY(A) -
Cost of sales 428,571
+ COST OF SALES (E) -
Inventory 428,571
VAT amount = 500,000 x 5/105 = 23,810
Sales value = 50,000- 23,810 = 476,190
Cost of sales value = 476,190*90/100 = 428,571

Scenario 2 – Export sales
The Company sold goods to overseas customer for AED 100,000 on 15 January 2018.
+ AR (A) -
Sales 100,000
- SALES (I) +
AR 100,000
- OUTPUT VAT (L) +
AR -
NO VAT as exports outside GCC VAT territory are zero-rated.

Scenario 3 – Sales to KSA
The Company sold goods to customer in Saudi Arabia for SAR 100,000 on 15 January 2018. Exchange Rate: 1SAR/AED = 1
+ AR (A) -
Sales 100,000
- SALES (I) +
AR 100,000
- OUTPUT VAT (L) +
AR -
No VAT will be charged as the customer is liable to report tax on the basis of
reverse charge mechanism.
We need to clearly state this fact in our invoice though.

Scenario 1 –Sales return
The Company sold goods to Local customer for AED 500,000 on 15 January 2018. Goods amounting to AED 1,500 were returned.
Accounting entries to be passed at the time of booking of sales return will be:
+ AR (A) -
Sales 476,190 Sales return 1,429
Output VAT 23,810 Output VAT 71
Total 500,000 Total 1,500
+ SALES RETURN (E) -
AR 1,429
- SALES (I) +
AR 476,190
- OUTPUT VAT (L) +
AR 71 AR 23,810
VAT amount = 1,500 x 5/105 = AED 71
Sales return amount = 1,500 x 100/105 = AED 1,429

Scenario 2 – Discount given on early settlement.
The Company sold goods to Local customer for AED 500,000 on 15 January 2018. Credit terms were 60 days. The Company accepted AED
450,000 as full settlement of outstanding balance on 15 February 2018.
Accounting entries to be passed at the time of booking of receipt will be:
+ AR (A) -
Sales 476,190 Bank account 475,000
Output VAT 23,810 Discount Allowed 47,619
Total 500,000 Output VAT 1,190
Total 500,000
+ BANK ACCOUNT (A) -
AR 475,000
+ DISCOUNT ALLOWED (E) -
AR 47,619
- OUTPUT VAT (L) +
AR 2,381 AR 23,810
VAT amount = 50,000 x 5/105 = AED 2,381
Discount allowed amount= 50,000 x 100/105 = AED 47,619

Scenario 3 – BAD DEBT.
The Company sold goods to Local customer for AED 500,000 on 15 January 2018. Credit terms were 60 days. The Company accepted AED
450,000 as full settlement of outstanding balance on 15 February 2018. The rest has to be written-off as bad debt.
Accounting entries to be passed at the time of booking of receipt will be:
+ AR (A) -
Sales 476,190 Bank account 475,000
Output VAT 23,810 Bad debt 47,619
Total 500,000 Output VAT 2,381
Total 500,000
+ BANK ACCOUNT (A) -
AR 475,000
+ BAD DEBT (E) -
AR 47,619
- OUTPUT VAT (L) +
AR 2,381 AR 23,810
VAT amount = 50,000 x 5/105 = AED 2,381
Discount allowed amount= 50,000 x 100/105 = AED 47,619

S.No Nature of transaction VAT implication
1 Foreign exchange gain/(loss) No VAT as it’s an internal adjustment only.
2 Stock price adjustment No VAT as it’s an internal adjustment only.
3 Physical stock variations posted in wastage and expiry account
No output VAT is charged. Input VAT is
deductible .
4 Interest expense or income No VAT as it’s zero-rated.
5 Depreciation Non-cash internal transaction. Out of scope
6 Payroll Out of scope of VAT
7 Debit notes issued to local customers
Tax debit notes to be issued. Output VAT
must be applied.
8
Debit notes issued to customers and suppliers outside UAE
No VAT to be charged. Considered as exports
9 Debit notes to suppliers within UAE and KSA i.e. GCC VAT Territory
Input VAT will be reduced to the extent of VAT
amount on debit note. Supplier must issue
TAX Credit Note.

Thank you

Understanding VAT and bookkeeping

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