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Value Added Tax (VAT) will start in the UAE from 1 January 2018.
What you need to know:
Who has to pay VAT?
If your business provides goods or services, it must be registered for VAT. Examples include:
1. main contractors performing work for owners;
2. subcontractors performing work for head contractors;
3. consultants providing advice or services; and
4. suppliers selling goods.
We’ll call these businesses ‘sellers’ and their customers ‘buyers’.
How will VAT affect contracts signed before 1 January?
If your contract is formed before the VAT start date, any part of the supply occurs after the start date, and the contract doesn’t cover tax, the contract price, or relevant part, will be inclusive of VAT. The seller will have to pay VAT to the government and will not be able to pass that VAT onto the buyer.
There will likely be an exception to this rule: if the buyer is VAT-registered and can recover the VAT, then the seller can add VAT to the price so that the buyer pays for it. The buyer could then deduct that VAT in its tax return. We are awaiting confirmation of this rule.
Sellers should be especially careful here: if the price is VAT-inclusive because the contract doesn’t cover tax, the seller will automatically be liable for VAT, regardless of whether they didn’t include it in the price. Sellers could accidentally cost themselves 5% of the price this way.
Some contracts, such as FIDIC, allow sellers to adjust the price if a change of law affects the seller’s ability to perform the contract. It is uncertain if such a provision would qualify as “a clause relating to tax”. This means it probably wouldn’t protect sellers’ ability to recover VAT, because VAT liability would not interfere with the seller carrying out their obligations. Similarly most contracts will not allow for price changes due to changes in cost and will not allow for VAT to pass through to the buyer.
For any new contracts, the parties can negotiate who will be responsible for VAT, and in what amount. They must include such arrangements in their contracts.
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