One of the most important aspects of starting a business in the UAE free zone is managing your finances. The way you opt to track and record your finances can make or break your company over time. Hence, it’s important to build financial literacy for entrepreneurs.
Once you understand and opt for an ideal solution, your company can grow much faster and efficiently. Continue reading to learn about why it is important, how to manage it, VAT and more.
Financial literacy for business
When starting your company, the cost of license isn’t the only key expense that you need to take into consideration. Although it does play an important role, it definitely is not the only essential expense.
There are other crucial spendings that you have to take into consideration. These include salaries for your employees, marketing budget, operational costs, office rents and much more.
After the process of your company setup is complete, you will most likely need access to capital down the line. This can be accomplished through business financing.
Regardless of the size of the company, most businesses seek capital infusions in order to meet short-term obligations. In addition, accounting roles are often overlooked but in fact, it plays a crucial role in the way your company functions.
The hack to balance your business’ finances
- Maintain accurate records and track them regularly
- Ensure you have a separate bank account for your business to keep a clear records of the flow of cash within the organisation
- Set aside savings from your income to be prepared for any setbacks
- Set a clear budget and compare the spendings every month to ensure you stay on track
- Keep track of other records such as VAT as well
Understanding Value Added Tax and the importance of bookkeeping
Value Added Tax is often referred to as VAT in the UAE. It was introduced in 2018 on 1st January and has been implemented as the general consumption tax of goods and services. This applies to all goods exchanged within the territorial area of the UAE.
The Federal Tax Authority’s VAT eligibility criteria are dependent on a company’s total turnover and total taxable expenses. Once a company is formed, they can register for VAT under one of two categories.
- Total sales
- Total expenses
These include the VAT amount paid for any expenses spent for your business. This could include costs such as VAT paid for machinery or other equipment. However, this is not applicable to tax paid internationally.
For instance, if you were to purchase machinery internationally and paid tax for the equipment’s spendings, it will not be included as VAT expenses in the UAE. It would instead be considered as 0 rated VAT.
You must also take into consideration of the two types of VAT registration services in the UAE:
1. Mandatory VAT Registration
Mandatory VAT Registration in UAE
It is applicable on individuals or companies that have an annual turnover of AED 375,000 or more. If your business falls in this category, you are required to get a Tax Registration Number (TRN) to conduct your business in the UAE. You can then implement VAT on your supplies and collect VAT on behalf of the FTA. If you do not register for mandatory VAT, you will be required to pay a fine.
You are eligible to apply for Mandatory VAT Registration if you satisfy either of the following criteria:
- Your business turnover and imports were over AED 375,000 during the last 12 months
OR - You anticipate that your business turnover and imports in the next 30 days will be more than AED 375,000
Voluntary VAT Registration in UAE
It can be applied by individuals or companies that have an annual turnover of over AED 187,500 but less than AED 375,000. If your business falls in this category, you may apply for VAT registration and get a TRN, voluntarily. Should you choose to not register for VAT, you will not be fined nor will you face any legal issues as long as your total turnover is still below AED 375,000.
You are eligible to apply for Voluntary VAT Registration if you satisfy either of the following criteria:
- Your business turnover or taxable business expenses or imports were more than AED 187,500 in the last 12 months
OR - You anticipate that your business turnover or taxable expenses or imports in the next 30 days will be more than AED 187,500
When you do not have a Tax Registration Number (TRN), you are not eligible to mention VAT in your invoice. You will only be eligible to do so once your TRN has been generated. If you proceed to mention VAT in your invoice without a TRN number, there will be a penalty from the FTA. In addition, it is important to ensure that your company keeps records of all spendings and earnings of each year.
Need additional guidance?
Shuraa will help you get started with your company and ensure that the entire process runs smoothly.
Shuraa has been one of the leading business setup companies in the UAE for over 20 years. Furthermore, our goal is to help entrepreneurs build a foundation in the UAE’s thriving economy, from start to finish.
To get in touch with our expert business consultants, call us on +97144081900. Send a WhatsApp message for a chat query on +971507775554. You can also email us at [email protected]. You can also get in touch with our international tax experts, visit https://bit.ly/2Wphtcq.
