The United Arab Emirates (UAE) witnessed a landmark tax reform in 2018 with the introduction of Value Added Tax (VAT) on the supply of goods and services. VAT, a consumption based indirect tax, is borne by the ultimate consumer of goods or services. In the UAE, VAT is levied on most goods and services with the exception of either exempt or zero-rated transactions.
It has been more than six months since VAT has been implemented in the UAE, and in this time, organisations have gained knowledge as to the principles and mechanism of the UAE VAT laws. The Federal Tax Authority (FTA) has also published detailed guides and public clarifications to explain the treatment of VAT on numerous issues. However, as it is the first year of VAT implementation, many organisations have failed to remain cognisant of VAT provisions, and have found the process of completing a VAT return to be challenging.
While conducting VAT impact assessments and health checks, the VAT team at Grant Thornton UAE has seen that the hospitality sector is in particular experiencing teething issues due to its close relationship with other sectors hugely impacted by VAT such as retail, tourism, and air travel. In this article, we list five key areas of opportunity which the hospitality sector can focus on to improve VAT adoption.
Free of Cost Supplies
The major issue experienced by most hotels in the UAE is the accounting of VAT on free of cost (FOC) supplies of food, gifts or rooms to guests, bloggers and other business connections. The UAE VAT laws provide that VAT should be accounted for by the business, on FOC supply of goods if the cost incurred to make such a supply is more than AED 500 per person for the previous 12 months, or AED 40,000 for FOC supply of goods and services for the previous 12 months. The above provisions have come as a challenge for the hospitality industry as hotels do not earn any money from FOC supplies but VAT still needs to be paid on them.
Advance deposits received by hotels are not being recognised as revenue according to the date of supply provisions. Further, in many cases it has been noted that the tour operator (acting as an agent for guest bookings) has supplied services on behalf of the hotel but then, has not shared the sales report with the hotel (acting as a principal) before end of the month. As a result, the date of supply is not correctly established causing the incorrect accounting of VAT.
Reverse Charge Mechanism
Many hotel businesses are still uninformed about basic concepts such as the Reverse Charge Mechanism (RCM) and difference between ‘reimbursements’ and ‘disbursements’. As a result, VAT liability is not being discharged appropriately by hotels.
In many cases hotels consider the transaction of providing foreign exchange as taxable in nature and charge VAT at 5% on the profit amount – this is a misinterpretation which should be corrected.
Local Transportation Services
There is a lack of clarity amongst businesses about local transportation services. Many industry players have treated the supply of local transportation services to hotels as a standard-rated supply, but this is not in line with the UAE VAT laws.
The aforementioned issues suggest more challenging times ahead for the hospitality sector until such time that the FTA publishes detailed guidelines for the industry specifically. Considering the intricacies involved in the hotel business and the volume of transactions, hotels should consider conducting a detailed VAT health check to ensure unnecessary risks are avoided or well managed, and that businesses are VAT compliant.