Value Added Tax liability on pre-VAT Contracts in UAE
As per the official statement released by the Federal Tax Authority (FTA), businesses are liable to pay VAT on their pre-2018 contracts unless the contracts specifically mentioned that amount was “exclusive of taxes.” In case if the contract amount was exclusive of tax, the consumers are directly liable to pay VAT on related services.
The terms are applicable only to contracts that were issued before 1 January 2018 while the services were delivered fully or partially only after VAT launch.
According to the official rule, “The agreement should state that the fee applicable does not include VAT or any of the tax concerned, and also specify that the merchant reserves the right to charge VAT or any other tax that may be implemented in the country at any point during the agreement period.” If the agreement doesn’t include such terms, the merchant cannot ask consumers to pay the VAT, in partial or full. Such contracts are considered “silent.”
Federal Tax Authority clarifies liability for Value Added Tax (VAT)
Many businesses were seen facing disputes from their consumers regarding the VAT liability on pre-VAT contracts. Now, the FTA statement clarifies the doubt. The major dispute emerged between Fitness First (health club) and its members, where many members complained that the company is asking them to pay taxes on the 2018 part of their membership. Customers had already paid the full membership amount as per the company’s 2017 rates, which were exclusive of VAT. However, there was no mention of ‘tax liability’ in the contract and therefore, customers are not liable to pay.