Module 6 · Advanced · 8 min read

How UAE VAT works

You will be able to: Explain how output VAT, input VAT and the net amount fit together; Tell apart standard-rated, zero-rated, exempt and out-of-scope supplies; Work out VAT on a net price and on a VAT-inclusive price.

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VAT (value added tax) is a tax on consumption that is collected in stages. Every VAT-registered business adds VAT to what it sells (output VAT), pays VAT on what it buys (input VAT), and sends only the difference to the Federal Tax Authority (FTA). The customer at the end of the chain, who cannot recover VAT, is the one who really bears it. For a registered business, VAT is therefore neither income nor expense: it is money collected for the FTA, or recovered from it.

The Tax settings screen listing the tax codes such as standard rated 5 percent, zero rated, exempt and out of scope, each with its rate and the VAT 201 box it lands in.

Settings, Tax: every tax code with its rate and the box it feeds.

Settings, Tax: every tax code with its rate and the box it feeds.

The UAE standard rate is 5%. The FTA's VAT Returns User Guide describes standard-rated supplies as supplies subject to VAT at 5%. Every sale and purchase you record falls into one of four treatments.

The four treatments

TreatmentVAT chargedWhere it is reported (VAT 201)Examples given in the FTA VAT Returns User Guide
Standard-rated5%Box 1 (by emirate)Most goods and services
Zero-rated0%, but still reportedBox 4Exports of goods and services outside the UAE, certain education and healthcare, investment precious metals, crude oil and natural gas
ExemptNo VATBox 5Certain financial services, sale or lease of residential buildings (other than zero-rated ones), bare land, local passenger transport
Out of scopeOutside UAE VATNot in the returnSupplies the UAE VAT law does not cover at all; ask your accountant if unsure
Watch outZero-rated and exempt both show VAT 0.00 on an invoice, but they are not the same. With zero-rated sales you still recover the VAT you paid on your costs. The FTA guide says input VAT that relates directly to exempt supplies is not recoverable. The wrong choice files a wrong return.

Output VAT, input VAT and the net

  • Output VAT = taxable value x 5%. Taxable value is the price before VAT, after discounts.
  • If a price already includes VAT, VAT = price x 5 / 105.
  • Net VAT payable = total output VAT minus total input VAT.
  • A positive net is paid to the FTA. A negative net is recoverable: per the FTA guide it can be carried forward against later amounts or refunded on request.
A small trader's monthSales: AED 10,000 before VAT, so output VAT is 500. Purchases: stock AED 6,000 plus VAT 300, and rent AED 1,000 plus VAT 50, so input VAT is 350. Net VAT payable is 500 minus 350 = AED 150.
A VAT-inclusive till priceA shop sells an item for AED 2,100 including VAT. VAT = 2,100 x 5 / 105 = AED 100, and the sale before VAT is AED 2,000.
A refund monthSales of AED 4,000 give output VAT of 200. A large stock purchase of AED 20,000 gives input VAT of 1,000. Net = 200 minus 1,000 = minus 800, so AED 800 is recoverable.

Where Zeyto fits

You never type VAT by hand in Zeyto. Each document line carries a tax code, Zeyto works out the VAT from that code and records it for your VAT return when you submit the document. Drafts are not counted. Zeyto comes with five codes that match the four treatments above, plus reverse charge, which you will meet in lesson 5: SR5, ZR, EX, RCM and OOS.

The VAT Return worksheet for the current month showing the tax period picker, the net VAT payable tile and the boxes for outputs and inputs.

VAT, Return Worksheet: outputs, inputs and the net you owe.

VAT, Return Worksheet: outputs, inputs and the net you owe.
TipA sales line coded ZR (zero-rated) and one coded EX (exempt) both print VAT 0.00, but Zeyto reports them in different boxes: ZR in Box 4, EX in Box 5. Always check which one the supply really is.

Rules change; always check the FTA website.

Try it in the demo

  1. Open the Zeyto demo and go to Settings, then Tax (under Finance & Tax).
  2. Find the codes SR5, ZR, EX, RCM and OOS. Note the Rate % of each.
  3. Look at the Sale Box and Purchase Box columns: ZR and EX both have 0% but different sale boxes.
  4. Click SR5 to see its Treatment. Do not save any change: the demo is shared.
Open the live demo

Public demo company, sign in as admin / demoAdmin123. Data refreshes nightly.

Key takeaways
  • VAT is collected in stages; a registered business pays the FTA only output VAT minus input VAT.
  • The standard rate is 5%; VAT inside a VAT-inclusive price is price x 5 / 105.
  • Zero-rated, exempt and out-of-scope supplies are different and are reported differently.
  • Zeyto calculates VAT per line from the line's tax code.

Check yourself

5 questions on this lesson. Not timed, not the exam, and you can try again. Score 60% or more, and read the lesson, to complete it.

1. What is the UAE standard rate of VAT?

2. Zero-rated and exempt supplies are treated identically on the VAT return.

3. In Zeyto, the EX (exempt) tax code reports sales in which VAT 201 box?

4. A trader sells AED 10,000 before VAT, buys stock of AED 6,000 plus VAT 300 and pays rent of AED 1,000 plus VAT 50. What is the net VAT payable?

5. Which statements about exempt supplies are true?

Select all that apply.

Previous: POS cash handling and day-end closingNext: Registration thresholds and your TRN

Practice questions for this module · Printable study sheet