POS sales and VAT - Thinking beyond Tax invoices!

Do you record sales on a Point of Sale machine? Are you thinking to deploy a new POS system for your business? You need to think through VAT!

Introduction

In the UAE, retail industry represents a significant portion of economic activities, as evidenced by its large share in the GDP of the country. Point of Sale (‘POS’) machines are indispensable for any retail business - be it a restaurant, a clothing store, a supermarket,a gym, a fuel station - to name a few. Each sale with a customer is recorded by a POS machine which automates invoicing, sales recording and even update inventory levels in retail stores. They also support modern methods of barcode based price reading, which help in implementing automated internal controls for a business. The tax invoices generated by these machines support recoverable input tax, in case the acquisitionsmadeare in the course of a business.Even for a tax unregistered customer, these invoices are important as they support warranty claims of any eligible item.

Whilst there are numerous vendors who actually provide robust POS systems with capabilities of required customization for their customers who run businesses, there are some underlying VAT implications which are often missed. Businesses generally conclude that mere tax invoice generation is all they need to do in order to comply with VAT law. There are a lot of other aspects which are not carefully thought upon and dealt with. This article deals withsuch aspects that can help a business address tax matters at the time of deployment of POS systems in their revenue streams, or while evaluating a new POS vendor on technical aspects.

Technical discussion

The following technical aspects of UAE VAT law should be considered while recording sales through POS machines

Zero rating of eligible products – There are certain eligible products which may be sold over the counter through POS systems, which are eligible for zero rate of VAT. These generally include eligible pharmaceutical products and medical equipment. The zero rating of VAT applies on fulfilment of conditions such as certificates issued by Ministry of Health as mentioned in the cabinet decision governing such zero rating. It is important for businesses to identify whether the goods sold through POS systems capture correct zero rating treatment, and are adequately backed-up for substantiating zero rate of VAT.

Tax invoices – There is a mandatory requirement to generate a tax invoice in the VAT legislation for each taxable supply[1], and therefore each sale is required to be backed up with a tax invoice. A tax invoice issued to a tax unregistered customer can be a simplified tax invoice[2]. Most POS machines generate invoices with a simplified tax invoice format. If a tax registered customer requires a tax invoice for recovering input tax, then such simplified tax invoice format from POS can only be used in transactions where consideration does not exceed AED 10,0002. However, in case the consideration exceeds AED 10,000, a full tax invoice is required to be issued. This is relevant for high value transactions where an employee of a tax registered business acquires items from a retail store for business purposes. A simple example can be a laptop bought for business use from a retail store by a tax registered business managed and owned by a single natural person.

Rounding off tax amount on tax invoices

The law requires mathematical rounding of tax amount charged in the tax invoice to the nearest fils. POS system charging tax should specifically cater to this requirement.

VAT inclusive prices on tax invoice at line level or total level?

By plainly reading the simplified tax invoice contents stipulated in the law[3], the need is to provide the total consideration and the tax amount charged, which would mean the requirement is to provide tax amount at total level, while the item level prices in the invoice can be VAT exclusive. In this regard, the Federal Tax Authority recently published an illustration for a simplified tax invoice which provided line level values inclusive of VAT, while also mentioning total consideration and total tax amount at the total level. This may be due to a joint reading of invoice contents with another requirement in the law for displaying VAT inclusive prices[4] in a retail set-up. A line level VAT inclusive price also helps the consumer, who actually bears the VAT in supply chain, to know how much all-inclusive price he is paying for a particular good or service. This approach is of course debatable, as the legal contents do not stipulate VAT inclusive prices on a line level on the invoice, more so in a case where a consumer is already aware by seeing a VAT inclusive price in the same retail store. However, on a conservative basis, it is recommended to have VAT inclusive prices at line level detail.

Sequential/unique invoice numbers

While the mandatory contents3 of a simplified tax invoice do not mention a sequential tax invoice number or a unique number, most POS machines generate invoice numbers which provide greater controls to the businesses over the sales made. The invoice number syntax generally reflects various parameters such as a store number, a date with month or a year, as maybe determined by a business taking into account several commercial and IT considerations over invoicing. From a VAT perspective, the following points are pertinent to note:

• If the invoice numbers aregenerated and printed on the invoice, they should be in a sequence, and gaps if any, should have sufficient audit trail. This is necessary as any auditor may look for gaps in the invoicing pattern. The gaps may also be construed as unrecorded sales in absence of satisfactory evidence, attracting VAT penalties.
• If multiple retail outlets are managed by a single POS server, the best practice is to ensure that same invoice number is not repeated across multiple outlets, as the requirement is to enable the identification of the tax invoice and the order of the tax invoice in any sequence of invoices.
• The above points can be easily addressed by designing a logical invoice number sequence and deploying it in initial IT set up of POS machines.

Record keeping requirements

The record keeping requirements stipulate that tax records (which include tax invoices) are to be archived for a period of 5 years. It is the most important requirement and is often missed to be addressed completely. Most POS systems provide tax record keeping solutions by way of re-printing of historical sales data. The following should be kept in mind while using this practice as a record keeping solution:

• The sales data and tax invoices must be archived and backed up from time to time in a server used by businesses, and not with the POS vendor. This helps businesses ability to retain tax data in an event of discontinuance with a POS vendor.
• The re-printing mechanism must be checked thoroughly at the time of deployment, as sometimes a reprinted POS invoice does not match with sales actually made in the past and reported in the VAT return. This may be due to pricing updates for a product, deleted or modified inventory code in ERP, inability of POS to read through archived metadata etc. Once deployed, these points must also be checked regularly to check POS system’s ability to meet record keeping requirements.
• Interfacing POS data into sales ledger - Generally speaking, multiple POS invoices are interfaced at day-end into sales sub-ledgers as a single summary line item and a different invoice document type. This reduces the number of line items of data which easies sales reporting. However, during such consolidation, it should be kept in mind that the invoice numbers issued by POS are also archived properly, so that actual sales made at POS can be correlated with the summarized sales data recorded in sales ledger.

Emirate Wise reporting

The legal requirements in this regard stipulate that tax records must identify the Emirate[5] in which the sales is required to be reported. It implies that tax invoice should contain sufficient information so that the Emirate in which the sale is made is identified appropriately. For instance, in case of a retail store registered as a tax registered business in the UAE with a corporate office in Dubai, but having presence in Sharjah and Abu Dhabi as well, the POS invoice should identify the Emirate in which the sales are made.

Migration of a POS machine from one Emirate to another

In case a retail store is closed in one Emirate and migrated to another Emirate, the POS machine data for sales recorded in previous Emirate must be archived properly so that the sales records in the new Emirate are not mixed up. This may happen because the record keeping solution is pivoted on the concept of re-printing tax invoices, as discussed above.

Goods return procedures – Return and refund or exchange of goods?

In case of goods return, the transaction triggers issuance of a tax credit note[6]. In case of exchange, the transaction implies cancellation of previous sale and supply of another goods in return. The tax implications need to be thought thoroughly and implemented correctly in the live scenarios.

To conclude the above, businesses should analyze the above points in their scenarios and address these points carefully. Discuss these points with IT vendor deploying the POS system. The above points are also handy in case of technical evaluation of a POS vendor. A thoroughly VAT compliant POS system offers more internal controls, more governance to a business for sales effected through multiple retail outlets.

Disclaimer – The above discussion is based on the personal opinion and reading of the law by the author, and may differ from a tax authority’s interpretation of legal requirements.

[1] Article 65(1) of VAT Decree-Law

[2] Article 59(5) of VAT Executive Regulations

[3] Article 59(2) of VAT Executive Regulations

[4] Article 38 of VAT Decree-Law read with Article 27 of VAT Executive Regulations

[5] Article 78(2) of VAT Decree-Law

[6] A joint reading of Articles 61 and 62 of VAT Decree-Law

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax.