The implementation of VAT in the UAE left many registrants under the VAT laws asking questions, especially when it first came into operation. Now, several months down the line there are still some key issues that are not easily deciphered. Luckily, there is an avenue to answer some of these issues where clarity is still not obtained and that is to proceed with a Clarification Request to the Federal Tax Authority (FTA).
It is extremely common in the legal field and similar professional environments, for clients to pay a deposit, monies on file for disbursements or an advance payment for work that may only commence some time thereafter or that may take some time to resolve. In terms of Article 25 of the Federal Decree Law No. 8/2017 (the Law), the date of supply (which is when VAT would determine VAT to be due) for services is the earlier of the following:
• The date Services are completed; • The date of receipt of payment; or • The date on which the Tax Invoice is issued.
Article 25(1) and 25(3) are not of any concern in the day to day operation of a business as this allows for immediate calculation of the VAT due and the ability to charge the recipient the VAT. Article 25(2) is more concerning with respect to legal and similar service providers. The reason for this is that should the client make payment as a deposit for legal or other professional fees that will become due in the future, there is not always a guarantee that the service will be supplied immediately or even at all when considering the nature of the matter being attended to. Nothing may happen for a few months or very little may happen for a while or it may happen that the service will be provided over a number of months and not occur in one singular supply.
In terms Article 25(2) of the Law, even though no actual service has yet been provided or not completed, as the client has made payment, the date of supply is determined as the date of receipt of payment, and the supplier must issue a tax invoice within 14 days as per Article 67 of the Law and pay the VAT over to the FTA by the due date of the following tax return. Issuing a tax invoice to a client when you have not actually done any work or too little work, is not feasible or correct in the context of the concerned professions. The payment from the client is effectively being held in trust for the client and by issuing a tax invoice for services which have not yet been provided would not correctly reflection of the situation especially if the services are not completed to the extent of the payment received, which may be the result of a quotation for a complete scope of work which does not run to completion or in the case of a litigation matter which is settled early. This practice, can obviously cause financial stress on a business were a credit note would have to be produced and the unutilized monies refunded to the client even in cases were the VAT has already been paid over to the FTA.
In considering the above scenario and the relevant Articles of the Law, BSA Ahmad Bin Hezeem and Associates LLP (BSA) made such a clarification request to the FTA for clarification of the date of supply regarding advance payments by clients, when the supply has not yet been delivered or fully delivered and sought clarification from the FTA on how to deal with advance payments.
The clarification issued by the FTA was that when the registrant under the Law attains the unfettered rights to the payment, then that occurrence can be considered to be the date of supply and a tax invoice must be issued within 14 days thereof. Where the registrant under the Law receives the funds into the account but does not gain unfettered rights to the payment, then the date of supply cannot yet be considered to have passed and no VAT is required to be calculated or paid over to the FTA until the firm gains the unfettered rights to the advance payment. This can be considered with periodical supplies as well, for e.g. (ratios may vary) if 1/10th of the work has been completed, then the firm would have acquired rights to 1/10th of the advance payment and a tax invoice must be issued for that 1/10th and VAT is payable on that 1/10th. The FTA’s clarification is a fair interpretation of the Law and creates a clear and efficient manner by which advance payments may be dealt with.
It must be noted that the aforementioned clarification is not for use by persons other than the applicant for the clarification and only the applicant and the FTA is bound by the clarification decision when the factual circumstances are the same as described in the clarification. However considering this, the principles of this clarification should be followed in future clarifications and each respective business with the same set of facts should apply for such a clarification or such other that may be necessitated by their circumstances and BSA are willing and able to assist in obtaining clarifications whether it be on the above subject matter or any other.