Tax Measures to Improve Cash-flow Position During Covid-19

The corona virus outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy. This article is intended to help companies to manage their cash and liquidity position from VAT perspective.

During any protracted period of crisis, the ability of an organization to manage cash and cash flow becomes a vital operational tool that impacts success. Clear insights into strategies impacting cash flow are critical to near-term decision making and can help you understand the potential longer-term impact on the health of your balance sheet

There are key steps you can take now to ensure your organization is prepared to manage the cash flow while ensuring adherence to local rules and regulations during the crisis COVID-19:

1. Re-negotiation with the supplier for payment terms:

One of the effective ways to improve your cash flow is to re-negotiate the payment terms with vendors and suppliers. Adding time onto payable schedule is the equivalent of getting a short-term loan. It gives us the ability to put our cash to use in ways that can add to our bottom line.

Re-negotiation for payment terms will also help the businesses in order to keep the VAT credit claimed as per Federal Decree-Law No. (8) of 2017 on Value Added Tax.

As per Article 55 of the Federal Decree Law, Business can claim the Input VAT credit if:

(a)  Tax invoice has received

(b)  An intention to make the payment of consideration of the supply before the expiration of six months after the agreed date of payment is formed.

E.g. ABC LLC has received Tax invoice and intention to make the payment has agreed on specific date. However, VAT input credit need to be reversed if ABC LLC fails to make the payment before the expiration of six months after the agreed date of payment.

Due to the current lock down situation and many businesses working offline, there is a probability that the businesses may fail to pay certain due bills on the agreed date.

Further, where businesses fail to make the payment of consideration before the expiration of six months after the agreed date of payment, they need to reduce the Input Tax in the VAT Return of the Tax period following the expiry of the six-month period.

Therefore, businesses should re-negotiate the agreed date of payment with the suppliers in order to continue claiming the Input Tax credit without violating the provisions of Article 55 of the VAT Decree Law.

2. Applying for VAT Refund from FTA Authority:

Recovering VAT refund credits are crucial part for the businesses. Unclaimed Tax credits and missed or delayed refunds commonly cause negative cash flow, increase business costs and reduce profitability.

When the Input Tax is greater than the Output Tax on a VAT return, the Taxable Person is able to request a VAT refund after submission of the VAT return or at any later date.

The FTA has also published a detailed guideline on VAT refund in July 2018 stating that where the taxable person claims refund, the FTA will within 20 business days of an application being submitted, review the application and notify the Taxable Person of its decision to accept or reject the refund claim.

A successful VAT refund claim depends on complying with all of the conditions imposed by Tax administration. Understanding the detailed rules and thoroughly applying them can improve the chances of success in reclaiming VAT refund. Sometimes recovering VAT refund can be proven as difficult and time-consuming process and may be subject to intense audit scrutiny if proper information not submitted with FTA authority.

3. Re-consideration of VAT penalty imposed:

Situations may arise where the taxpayers are not satisfied with the decision given by the authority. In such cases, Businesses may apply for VAT Reconsideration. The Federal Tax Authority can waive and reduce the penalties when they have a justification to believe that the imposed penalties are unjust or unfair.

Reconsideration application can be submitted by any taxable person online to the authority appealing to review the case. The authority will review its decision and facts of the case and issue a new decision within 20 working days from the receipt of the application. The Authority will inform the applicant of its decision within five business days of issuing the decision.

During the ongoing crisis of COVID-19, businesses can assess the ongoing situation and can go for reconsideration request for waive off the penalty.

4. Assessment of VAT Input credit claimed

A Taxable person is entitled to recover all the Input Tax paid on the purchase of goods and services intended for the furtherance of business. The eligible unclaimed VAT credit may result in additional cost for the business.

Business should assess the VAT credit claimed in past and if there is an eligible V credit, which remains unclaimed than business should include those unclaimed VAT credit in their next return.

Further, if the amount of unclaimed Input Tax credit is more than AED 10,000/- for a particular tax period than business should file VAT Voluntary Disclosure to inform the Federal Tax Authority.

5. Other Measures

Apart from the measures listed above, Business should:

1.  Review ERP system and tax accounting system to allow correct and efficient tax reporting.

2.  Check the possibility of forming tax group to eliminate the VAT between the inter-company transactions.

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.