VAT for Used Car Dealers in UAE

What is VAT?

Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production.VAT in Dubai for used car dealer is 5%.

 Vat rate and its implication on used cars in UAE?

VAT will be levied at standard rate of 5% on the used cars. It is expected to create an immediate demand for car buyers to buy a new or used car before the price increase as a result of VAT implementation. Though it is the lowest VAT rate in the world, it is expected that customers would prefer to buy big brands luxury cars before the implementation of VAT.

Affects of Implementation of VAT for Used Cars in UAE:

The used car market of the UAE will notice a remarkable change after the VAT implementation. The demand of used cars will increase as the car buyers will be interested to buy used cars than buying new ones with applied VAT prices, and this increase in demand for used cars will inflate the price of used cars. Used car dealers will try to make a good use of this opportunity to avail maximum profit as customers will look to avoid VAT and increased insurance costs on new cars, even if they have to pay a little more for a used car.

Increase in demand, Increase in Price:

The maximum advantages from the VAT implementation will be availed by the used car dealers. The 5% VAT, once implemented, will push the sales of used cars and that will allow the dealers to ask for higher prices for these used cars. Thus incorporation of VAT will be a welcoming factor by the used cars dealers.

Registration of Used cars in UAE

Both buyer and seller must be present at the time of used car registration, and following documents are needed.

Documents Required

1- Passport (original + copy) or Dubai driving license (original).
2- Insurance Policy (you may be able to transfer the old policy; if not, get a new one)
3- If the car is financed through a bank, take the proper documents, including ‘No Objection Letter’, if applicable.
4- Old registration card (if the registration is expired, the car should be tested at the Traffic Department or at Tasjeel Eppco or Emarat Shamil or Wasel Car Testing)
5- Original license plates

Procedure:

1- Visit to Dubai Traffic Department or to Tasjeel Eppco or Emarat Shamil or Wasel Car Testing
2- Fill in the form and pay the fees.
3- Pay the fines (if any) by the seller; the officer will examine and verify it.
4- Wait for your name to be called out and collect your new registration card , valid for one year.
5- Get new plates affixed to vehicle.
6- Send copies of registration card to your finance & insurance company.

Registration = AED 420 ( $ 114.50 ) short number plates, AED 470 ($ 128) long number plates 

Original Documentation and Service Record

Original Documentation of a car is an important for selling a used car in the UAE and even elsewhere in the world .A seller needs to keep registration documents, insurance documents (if insurance has not expired), car manual and other related documents of the car ready at the time of sales as it directly impacts resale value of your car. The seller can get the best resale value for the car with its original documents. Other than the original documents, service record of a car matters as well. It tells buyers how consistently or inconsistently a car has been maintained throughout the years of your use and this directly influences resale price of a car.

VAT Calculation

VAT will create a high demand on nearly new used cars as the dealer only pays VAT on the profit. A simple example is that a consumer could purchase a used car, 6 months old, low mileage and two trim levels higher than the original new car which is now priced at AED 105,000 due to VAT for AED 100,000. If the dealer operates and a 9% margin the VAT element is only AED 350

Financial Calculation

 Margin Scheme

VAT margin scheme is the tax difference between what you paid for an item and what you sold it for, rather than the full selling price. You pay VAT at 5%  on the difference. You can choose to use a margin scheme when you sell: second-hand goods.

To avoid double taxation where second hand goods are acquired by a registered person from an unregistered person for the purpose of resale, the VAT-registered person will be able to account for VAT on sales of second hand goods with reference to the difference between the purchase price of the goods and the selling price of the goods (that is, the profit margin). The VAT which must be accounted for by the registered person will be included in the profit margin. The legislation will include the details of the conditions to be met in order to apply this mechanism.

Treatment Of  Cars In UAE

The United Arab Emirates (U.A.E.) is the second-largest automotive market (including cars, parts and accessories, trailers and semi-trailers, trucks, public transport vehicles, and tractors) in the GCC after Saudi Arabia.  Passenger cars account for approximately 80 percent of the U.A.E. market, with commercial vehicles (trucks, vans and buses) accounting for the remaining 20 percent. The country has a great role in the car parts trade within the GCC region by positioning itself as a major re-exports center.   The U.A.E. relies heavily on imports, with virtually the entire supply of car and light vehicles being imported. Cars represent over 50 percent of automotive imports from the world, followed by parts and accessories, and trucks.

VAT which will be implemented in 2018 tends to create an increase sale   By 2020, BMI projects total U.A.E. vehicle sales will exceed 500,000.  There is also favorable outlook for the sale of luxury cars, electric and hybrid vehicles.

Thanks to the U.A.E.’s strategic positioning and economic conditions, it has become a regional hub for car parts and vehicle components for the entire Middle East. As a result, the U.A.E. is a key player in the car parts trade within the Gulf region and has positioned itself as a major re-export center.

Local Standards Requirements

• Link to GSO Standards Tests for Motor Vehicle Spare Parts: (UAE Scheme for Automotive Spare Parts)
• Link to GSO Standards Tests for Multipurpose Tires: (www.gso.org.sa/gso-website/gso-website/activities/conformity/conformity-certificates)
• U.S. tire suppliers must ensure that RFID labels are affixed on their tires before entering to U.A.E. market. For more information about RFID labels, please visit: (UAE Tire Labeling Scheme) Re-Manufactured/Used Auto Parts

The 5 percent import duty for new parts also applies to re-manufactured or used parts. The use of the company logo as well as the original packing design is not allowed for reconditioned/used parts. As there is a complete difference in packing from the original, advertising costs for resellers of reconditioned/used parts are higher even though the quality of the product is similar.  In general, U.A.E. consumers are not keen on the idea of used products.  U.S. companies entering this market should be prepared to invest in significant brand building to change U.A.E. perceptions regarding re-manufactured/used auto parts.

Flooring Line Of Credit

It is also referred as Retail floor planning or inventory financing is a type of short term loan used by retailers to purchase high-cost inventory such as automobiles.

Floor planning is commonly used in new and used car dealerships,most car dealers do not pay cash for the vehicles on their purchase. Even smaller dealerships can have an inventory of vehicles through floor planning.

Rather than use their own capital to pay the manufacturer, they use floor plan finance. The lender provides a line of credit against stock that is held with dealer. As the stock is sold, the debt is either repaid or new stock is purchased so at all times the financier has an agreed level of stock to secure the debt. If a stock check is done and there is insufficient stock then the dealer has to repay part of the finance.

Floor Line Of Credit with the bank

A  floor credit plan is basically like a revolving line of credit .Mr.X purchases a vehicle at an auction for AED 15,000 then sells the vehicle for AED 25,000. The bank would require you to pay AED15000, plus interest say at rate of 2%, on your dealer floor plan while you keep the AED10,000 profit. A bank will charge you a certain amount of monthly interest for your unpaid balance every month. Even if you carry an average balance of AED20 000 on your dealer floor plan, your bank interest amounts to around AED400 per month.

Always be prepared to make payments on your floorplan even if you have not sold any vehicles. You should try to have at least six months of your minimum floorplan payments on hand in cash so you can still make your payments if you have an extended sales drought with zero sales.

VAT Payment

VAT Payment is payment of tax by the VAT registered businesses to the government. From 1st January, 2018 onwards,goods and services are taxed at 5%.

Method to Determine VAT Payment in UAE

The formula to determine VAT payment in UAE is very simple. All you need to do is calculate your total Output VAT collected during the tax period and total Input VAT which you are eligible to recover. After determining, apply the following formula:

VAT Payment = Output VAT – (minus) Input VAT

Example of VAT Payment,

The VAT payment is determined by adjusting the Output VAT with Input VAT as shown below:

Output VAT AED 600,000  (Minus) Input VAT AED 400,000 = AED 200,000 is VAT payable which need to be paid to the government.

In some situations, Input VAT might be higher than the Output VAT. In such a situation, it will result in VAT refundable which can be carried forward to the next return period and will be allowed to be utilized against your future VAT liabilities.

VAT Payment Online

The VAT payable determined after off-setting the Output VAT with Input VAT needs to be paid through the FTA portal. The Online VAT payment facility will be provided in the FTA portal, wherein the registered businesses can remit the VAT payable.

Importance Of VAT Returns:

A VAT return is the formal document/statement of the VAT liability of a taxpayer for a particular tax period. It contains the details of VAT liability of the person,entity,company to be paid to the government for the quarter or for the month.

VAT returns are important because they contain the records of the tax paid by the users in a given period. It is a formal documental   proof that the certain entity has paid their tax. The government needs these records to maintain a proper taxation system where each taxable entity pays his/her tax liability on time. These are used by the tax authorities for performing auditing and other activities as per the tax laws. VAT return contains the summary of the total earning and the value-added tax paid on the earning for that particular period.

Procedure for Filing VAT Returns in UAE 

Each eligible individual and business in UAE will be required to register on the portal and file their tax returns as per the schedule. It is important to file VAT returns on time in order to keep good accounts with the authorities and to run a business properly.

As a VAT registered firm, you should file regular quarterly/monthly tax returns, even if you have not done any business or paid tax in a given period.

The VAT tax returns will most probably be filed online, and there will be no facility for filing tax returns offline or manually. So, the businesses need to get themselves familiar with the online VAT filing process. Upon registration on the VAT portal, each taxpayer will be given a unique TRN (Tax Registration Number) and password for their online account on the website. These details are to be used to file returns online. Follow the steps below.

1. Visit the online portal of the Federal Tax Authority at tax.gov.ae 2. Click the return filing option under the e-services section of the portal 3. Log in using your TRN and password 4. Fill in the VAT return form with the details of your business, transactions, tax liability, penalties (if any), etc. 5. Upload the required documents, bills, etc. 6. Verify the details filled by you and submit the form

There are many audit firms, tax consultants and accountants in UAE who can help you with the VAT implementation, rules and return filing once the new tax system is launched in the country.

But solution is on your doorsteps. Reach Accountant has designed their software considering the nature of the business, be it the used cars business. Below are mentioned distinguished features of Reach ERP.

Digital Agreements

Invoicing

Consignments

Profit per Car

Vehicle Management

Multi-Currency

Accounting

Purchases

Document Management

Mobile App

Commission Calculation