Can 1st VAT return period relaxation make my business DEFAULT?

As we all know UAE govt have relaxed tax return period for majority of companies and now for vast majority the first return will be submitted in May-June. The step was taken to ensure companies align their financial systems with newly implemented laws and get sufficient time to conveniently file their returns. The step was welcomed by majority of businesses as additional time may help them upgrade their financial systems and operations.

In UAE majority of people prefer easy installments. Both businesses and individuals get ready to pay slightly higher prices if payment is broken down into installments. Many property owners attract tenants these days by 6 or 12 cheques payments compared to historical norm of quarterly advance payments. Many businesses still lack proper budgeting and cash flow management and don't keep reserves for foreseen or unforeseen outflows.

Usually trading companies keep 2-3 months of stocks. This means companies which made bulk purchases in December have no adjustable input VAT however they started collecting sales VAT from January onward. Sales or Output VAT technically is a liability which businesses need to pay to the government however since payment to government is relaxed, companies may use the additional amount collected in form of tax to meet operational expenses as they have plenty of time to file first return. If proper cash management is not done and the output VAT is misused in operational expenses, the overall liability will accumulate and ultimately become huge. For companies with May or June as first return period means almost half year's VAT collections needs to be paid in single installment. With little or no input VAT to adjust due to pre-vat era procurement, the overall net payment may become a big challenge for smaller companies.

Companies in service industry also face similar dilemma. Service industries usually rely on HR and major portion of expense goes in salaries which has no tax impact. This means they also have negligible input VAT to adjust. If Output tax is not kept separate from company funds and company pays its first return in May-June, the overall VAT payment may get massive for them too.

Companies with cash flow issues therefore are strongly advised to calculate their monthly tax liabilities and top up their E-Dirham cards with total VAT liability. The other option might be to open a separate bank account and transfer any output VAT liability as reserve so at the end of quarter/tax period they have sufficient funds to pay accumulated VAT liability.

Remember the penalties on default and delays in payment are hefty. Government have given us opportunity to streamline our financial records and align our systems with new laws. We should utilize this opportunity and plan our business management efficiently and smartly.

Disclaimer: Brainstorm Accounting & Bookkeeping may not necessarily agree with all views of the blogger. Any suggestions/comments are welcome. For any VAT or other financial consultancy related inquiries please contact: info@bsaccountants.ae