Introduction of VAT in the Middle East – are you ready?
03 May 2017 - 22:19
By Paul Prescott, Legal Director, Pinsent Masons
The law which will introduce VAT in the region is anticipated to be published soon with speculation that VAT in the UAE will be effective from 1 January 2018. There is a widespread understand that other countries within the region will follow suit and introduce VAT, including Qatar.
There still remains uncertainty in terms of which goods and services will attract VAT and which exemptions, if any, will apply under this new regime. However, suppliers and contractors in the construction sector should consider the changes they will need to make to their businesses, including accounting systems, to calculate and report VAT when the law comes into force.
Application of VAT
VAT is an indirect tax applied upon the consumption of most goods and services. When the law comes into force, VAT registered businesses will be required to charge and add VAT to the value of goods and services they supply. It is anticipated that there may be zero rate supplies or specific exemptions that apply to certain goods and services. There may be some areas like the health care and education sectors which qualify at the zero rate of VAT.
The question which typically arises is: Whether the rates or prices in the agreement are “inclusive” or “exclusive” of VAT?
VAT: extra or included?
When the tax in question is VAT, there can be a degree of uncertainty. To avoid this uncertainty, the specific conditions of contract must clearly state whether or not VAT is payable on top of the hourly rate and/or contract price stated in the contract.
If the hourly rate and/or contract price in the contract is expressed to be exclusive of VAT and the employer is to pay “in addition” any VAT properly chargeable in respect of the amount due, the position is clear. In this case VAT is payable by the employer on top of the rates and prices stated in the contract.
More generally, if the hourly rate and/or contract price in the contract is not stated to be exclusive of VAT, or if the contract does not require the employer to pay VAT over and above the hourly rate or the contract price stated in the contract, the position may be that the contractor is deemed to have included VAT as part of its hourly rate or the contract price.
This is because the law does not require an employer to pay VAT as the employer’s obligation is to pay the hourly rate or the contract price under the terms of the contract – the obligation is on the contractor to pay the VAT to the relevant tax authority.
Also, relying on change in law provisions in the contract may not always be of assistance but much will depend on the wording contained in the contract.
The VAT law may seek to introduce ‘transitional provisions’, which deal with responsibilities to pay VAT where the contract is silent and does not expressly state that the contract price or rates are inclusive or exclusive of VAT. There is a risk that the VAT law may state which party is responsible for paying the VAT element of an amount due against services and goods. Therefore the VAT law may impose mandatory provisions which “override” the conditions in the contract.
If the contract is silent this may mean the employer may not be able to recover VAT against the contractor for amounts that are to be paid by the contractor to the employer. In most construction contracts, the employer is entitled to claim or contra-charge amounts from the contractor. If the contract is silent, this may also have adverse consequences for the employer.
As the VAT law has not been introduced, there is a risk that the delay damages may be subject to VAT. In other jurisdictions the VAT law makes it clear that ‘compensatory amounts’ do not attract
VAT. Until the VAT laws in the UAE and Qatar are published, the position on whether pre-agreed amounts in the contract to compensate a party when the other party is in breach of contract will attract VAT is unclear.
Suppliers and contractors should be aware of the introduction of VAT law in the region and should consider the potential consequences now, especially for long-term projects to prevent them incurring an unexpected loss.
(The views expressed in this olumn is that of the author.)