Many charities and non-profit organizations are confused with the implementation of Value Added Tax (VAT) in the UAE from January 1, 2018. The applications to the activities of all charities and the approach taken while determining the amount of VAT on input tax are the two contexts in which charities need to comprehend the consequence of VAT on them in the UAE. In both business and non-business activities, the specified people should be able to understand how the VAT will affect their charities. Under a special regime, certain charities are entitled to recovery of VAT as they are classified as established charities in the UAE. This blog details the VAT treatment of charities in the UAE.
Charities are set for the welfare of the public as they are not only aimed at making profits as per UAE VAT law. When a charity is considered a taxable person, VAT will be charged if any taxable goods and services are supplied for a charge. It is because in this case it would be considered a business activity for commercial purposes. In terms of making supplies, charities would be subjected to the usual rules of VAT in the UAE.
The business setup can help charitable organizations to ensure VAT compliance as such firms cannot ignore the rules of VAT in the UAE. They ensure to add more value to the business by serving their clients effectively.
The following are the VAT treatment of charities in the UAE:
VAT on Donated Goods and Services
By way of goods and services, charities often receive a lot of donations. These donations are used by charities as a part of the onward provision of charitable activities. Such activities are taken for the VAT treatment if they are carried out by the charity and a charge is made. For such activities, however, VAT will be charged as per the law in the UAE.
When the charity receives the relevant goods and services free of charge, there will not be any VAT on costs to recover. Thus, the charity would not have incurred any costs in such cases. However, the charities need to comply with the regulations and guidelines issued by the UAE central bank on Anti-Money Laundering in the case of donations.
Non-Business Activities for VAT in the UAE
The activity would not be treated as being liable to UAE VAT where the particular activity is performed by the charity that is acting in its charitable capacity. The activity would make no charge for the supply of goods or services concerned unless it is treated as a seems supply in ordinary conditions. However, by grants or donations, the relevant charitable activity would be subsidized at times.
There are cases in which the VAT would not be chargeable. Such is the case when the grantor is not entitled to any advantage in return for such grant or donation. In certain circumstances, the cost would be recoverable by the charity if there is no VAT on direct costs relating to such free provisions of goods and services. For the entrepreneur to know more about non-business activities for VAT in the UAE, company formation can help them know further in this matter.
Deemed Supply Provision for Charities
Even though there is no supply of goods or services, a taxable person would be required to account for output tax in certain circumstances. The UAE VAT law and its executive regulations would be applied in such cases. Depending on the situation, such deemed supplies can be subjected to VAT at zero rates or the standard rate of 5%.
In the case of charities, it would require goods and services to be given away. In such cases, the charities must make sure that the provisions of deemed supply would be applied. To determine the applicability of deemed supply provisions, tax agents in Dubai offer useful assistance.
If the relevant goods and services remain part of the assets of the charity, they would not be deemed supplied for VAT purposes. On the other hand, the supply would be treated as a deemed supply for VAT if the charity claims VAT for the acquisition of goods and then gives them away for free outright. In respect of the relevant goods or services, when input tax has been recovered, then only the deemed supply rules would apply.
There are some other cases where the deemed supply provision would not apply Such as the supply is exempt from tax, input tax was not recovered on the relevant goods or services, and the refunded input tax is amended according to the Capital Assets Scheme. Moreover, the supply would not be subjected to the deemed supply provisions in any case if the total VAT for one year is less than AED 2000.
Designated Charities
For a charity to be treated as a designated charity, there are some criteria to be fulfilled as they are subjected to special recovery rules. The foremost one is that the designated charity should be approved by the Ministry of Community Development. It should be funded primarily for donations or grants and must be operated on a basis of non for profit.
If the expenses are not related to exempt supplies made by the charity, designated charities are allowed to recover VAT on any expenses.
The charity must apply to be registered for VAT purposes if they are carrying on a business activity in the UAE. More than the voluntary VAT registration threshold, any charity carrying on business activity and making taxable supplies or incurring expenses should also apply to register for VAT purposes. Also, to benefit from the recovery of input tax, designated charities are subjected to apply and register for VAT.
The accounting companies in Dubai would help the person get more information on VAT on charities in the UAE. Depending on the specific circumstances of the individual, they can seek specialist advice from the accounting services in Dubai that would help them in all respects.
