The value-added tax (VAT) launched on 1st January 2018, in the UAE, has been affecting a lot of businesses all over the country. Legal (law) is one such industry that is experiencing the after-effects of the new tax system. While the standard rate of VAT in UAE is 5 per cent, some of the supplies such as healthcare and public transport have been kept tax-free.
There is a third category, called zero-rated VAT, which includes the supplies on which tax is charged at 0% rate. Let’s find out which category of VAT is applicable to the legal firms of the UAE and other VAT impacts on this industry.
The purpose behind the launch of the VAT is to create a new, more reliable, source of revenue for the government so that it can improve the level of services provided to the general public as well as the economic standing of the country in the international market. The legal firms, including law firms, lawyers and related companies operating in the UAE are also covered under the VAT.
VAT on Legal Firms in the UAE
A law firm or private law company (council) in the UAE whose annual turnover is over Dh375,000 need to register for VAT and charge VAT on their costs and fees charged to clients. VAT is not applicable to the salary (income) of individual lawyers working for law organizations. Only registered law firms and businesses are liable to pay VAT.
International law firms providing taxable services or performing business transactions in the UAE also need to register for the VAT, irrespective of the turnover (or VAT threshold), and pay tax to the UAE government.
VAT rate for law firms
The standard VAT rate of five per cent is applicable to the supplies (services) made by all tax registered law firms in the UAE.
Increase in the cost
The addition of tax will increase the cost of legal services in the UAE. The tax is paid by the end consumers and not by businesses. Law firms, however, have to upgrade their systems and train their employees or hire external help for VAT compliance. This is adding to the operational cost.
VAT Compliance for Law Firms
Law firms in the UAE are required to do a number of things to ensure VAT compliance. They might even have to update their business systems and infrastructure to perform the following tasks:
- Calculate and charge VAT from clients by producing proper VAT invoices
- File regular VAT returns
- Pay VAT to the UAE government
- Maintain proper VAT and accounting records
Input Tax Credit
Businesses in the UAE, including law firms, that are not exempted from the tax can claim a refund of VAT paid by them on input costs. The credit of input tax will only be available to companies that are registered for VAT in the UAE.
Reverse Charge Mechanism
Unregistered law firms (that are not eligible for VAT) providing supplies to a VAT registered company/person in the UAE are exempt from tax, however, the VAT will be paid by the registered buyer directly to the government in all such cases, according to the reverse charge mechanism.
If a taxable law firm in the UAE does not apply for VAT registration by the last date of registration, they will have to pay a penalty. Failure to file VAT returns or pay tax on time will also lead to a penalty. Non-filing or wrong filing of VAT returns is liable for a penalty. Tax evasion in any form is punishable by law.
The following records should be maintained by all VAT registered law firms in the UAE.
- Business contracts and agreements
- Accounting records
- Records of new and existing holding companies
- Turnover records
- Records of the sale/transfer of assets
- Ownership and registration records
- VAT invoices and bills
- Other tax records
Legal firms in the UAE may need to hire the assistance of professional tax experts, accountants or CAs who are familiar with the VAT tax regime and can provide much-needed help.