Hotel guests in the country are subjected to five per cent VAT, in addition to the existing 20 per cent
municipality fee and service charges combined, making the average room rates costlier. Additionally,
various leisure activities have seen pricing adjustments to include five per cent VAT from January 2018.
Hospitality & Leisure are very important sectors for the UAE and hotels in the region have
had to revise pricing strategies to adjust the impact of VAT. There are quite a few hotels which
have adopted an “All Inclusive” strategy bearing the VAT hit, whereas others opted for “VAT
Plus” pricing strategies. Nevertheless, all hotels have to display prices as “Inclusive of VAT.”
There are many distinct functions that are loosely categorized as part of the hospitality industry.
Most Hotel’s revenue streams include accommodation (room revenue), food and beverage revenue,
telecommunication (telephone and internet revenue), recreation revenue, banquet revenue, and
other rentals like concessionaire. All of these affect the application of VAT in one way or another.
The past few months have highlighted various issues relating to VAT treatment on typical hospitality
activities. We have summarized a few key issues hereunder:
1. Time of Supply:
As per Article 25 of the Federal Decree-Law No. (8) of 2017 on Value Added Tax (Decree-Law), “Tax
shall be calculated on the date of supply of Goods or Services, which shall be earlier of any of the
following dates:
• The date on which services are completed
• The date of receipt of payment
• The date of issuance of an invoice”
With regards to receipt of payment, it is important to note that even the part payment shall be considered for VAT.
As per Article 67 of the Decree-Law, “The Registrant shall issue a Tax Invoice within 14 days as of the date of supply as stated in Article (25) of this Decree-Law.”
The various issues that arise on a daily basis with regards to date of supply are to be dealt with as under:
a. Receipt of Advance: Advance payment by the guest is a tax point as per the time of supply rules.
However, the industry has been caught off guard as the front end (Invoice generating system) are not capable of recording VAT on receipts. Even if the system generates a Tax Invoice for the advances received, some of the systems have failed to map the advances received to the final Tax Invoice issued at the time of completion of service, either to the guest or to the travel agent. As a result, hotels have not been able to generate proper Tax Invoices for the advances received.
In such a scenario, in order to mitigate the non-compliance, many hotels have resorted to manual adjustments at the time of filing their VAT return. VAT on advances received is being accounted on the closing balance of advance as at the VAT quarter end. Though this does not cause any loss to the FTA, it is yet to be seen how FTA reacts to the administrative non-compliance of issuance of Tax Invoices at the earlier tax point of receiving an advance.
We recommend modifying the front end systems at the earliest so that a Tax Invoice can be issued within 14 days of receipt of advance payments. The solution providers must work on this issue to assist hotels in setting up the Tax points. Existing systems not supporting issuance of the Tax Invoices for advances received cannot be an excuse for non-compliance. Businesses will have to invest in the systems to avoid potential fines as per the Cabinet-Resolution-No-40- of-2017-on-Administrative-Penalties-for-Violation.
As per Table (3): Violations and Administrative Penalties related to the Implementation of the Federal Decree-
Law No. (8) of 2017 on Value Added Tax; “Failure by the Taxable Person to issue the Tax invoice or an alternative document when making any supply shall attract administrative penalty of AED 5,000 for each tax invoice or alternative document not issued.”
b. Completion of Service: The Industry has been facing a challenge in determining the point of completion of service. There are different approaches amongst hotels to deal with it. Many have considered the completion of service on a daily basis, right after the
night audit run is done, while a few have considered the guest checkout as the point of completion of service and a tax point for determination of time of supply and accordingly the VAT liability.
If the hotels account for VAT on a daily basis, there won’t be any issues when the services get completed within the same Tax Period (Tax Quarter). However, when the services extend from one Tax Quarter to the next Tax Quarter, the approach of daily accounting of VAT results in an advance payment of VAT for the days which form part of the former quarter without the actual completion of service and trigger of tax points. The hotels have resorted to this mechanism as their systems haven’t been completely configured for VAT reporting as per the Tax point.
Example 1: A guest checks-in on 28th of March and checks out on 4th April. Assuming the Tax period ends on 31st March, the hotel shall be reporting VAT amount as for the quarter not only till 31st March but till 4th April. As a result, advance VAT is paid to the FTA in the current
Tax period without the Tax point being triggered. The book keeping records and the VAT return records both shall show VAT recorded and reported till 31st March.
As the FTA stands to gain in terms of revenue due to such reporting approach and considering the administrative problems in rectifying the system issue coupled with immateriality (hotels needs to assess the impact to establish the immateriality), we recommend to continue the above approach resulting in advance payment of VAT to FTA. However, to avoid the potential penal liabilities, it is always
recommended to get the approach corrected timely.
We have also observed, there are few hotels reporting VAT based on the guests check- out date, treating the check-out date as Tax point. Their solution providers have assisted them in the getting appropriate reports from the systems for VAT reporting purposes. In this
scenario, when the services extend from one Tax period to the next Tax period, VAT gets correctly reported in the Tax period when the services get completed. There shall be a difference in the output VAT reported in VAT return at the end of Tax period when compared to the output VAT accrued whilerecording revenue as per the revenue recognition principles.
Example 2: A guest checks-in on 28th of March and checks out on 4th April. Assuming the Tax period ends on 31st March, the hotel shall be reporting VAT for that period only in the next Tax period. As a result, VAT gets paid to FTA in the period when services are completely
provided. There will be however be a difference in the VAT accounted as per revenue in the books and VAT reported as for the Tax period ended 31st March.
2. Financial Accounting vs VAT:
Many businesses have failed to understand the difference between financial accounting and VAT laws. In the UAE, financial accounting is based on the International Financial Reporting Standards (IFRS), whereas VAT Laws & Regulations establish the rules for recording and payment of VAT.
Revenue is recognized on a daily basis in the hotels based on the criteria spelled out under IFRS 15 for recognizing revenue over time. Revenue is to be recognized when an entity satisfies a performance obligation;
Performance obligation is satisfied if any of the following criteria are met;
- Customer simultaneously received and consumes the benefits provided by the entity’s performance as the entity performs, or
- The entity’s performance creates or enhances an asset, that the customer controls as the asset is created or enhanced, or
- The entity’s performance does not create an asset with an alternate use to the entity and the entity has an enforceable right to payment for performance completed to date.
Hotels must understand that VAT gets triggered in accordance with the time of supply rules as mentioned in Article 25 of the Decree-Law and not with revenue recognition in the books of accounts. This misunderstanding has resulted in an incorrect
identification of the point of completion of service in a hotel from the point of VAT Laws. There needs to be a proper reconciliation of such differences (the two examples above, illustrate such differences) which shall have an impact in identifying the cut-off dates.
3. Barter Transactions:
Exchange of services for consideration other than monetary shall fall within the ambit of barter transactions and may have a potential VAT impact. This is the area where VAT liability may go unnoticed and unrecorded. In such a case, the valuation rules will come into picture for determining the value of supply and the VAT liability.
As per Article 34 of the Decree-Law, “If all or part of the Consideration is not monetary, the value of the supply is calculated as the overall monetary part plus the market value of the non-monetary part of the Consideration, and shall not include the Tax.”
Article 1 of the Decree-Law defines Consideration as, “All that is received or expected to be received for the supply of Goods or Services, whether in money or other acceptable forms of payment”.
Hotels normally enter into agreements with many service providers wherein an exchange of service between the hotel and the service provider is apparent from the contracts. When such an exchange of service becomes a part of payment or consideration in the
contract, VAT shall have an impact on the value of supply in respect to VAT. However, if the services which are exchanged form part of rights and obligations in the agreement, then a VAT impact does not arise. Agreements must be closely looked at to arrive at the correct VAT treatment.
The FTA has been very proactive in their approach with regards to providing public clarifications and guidelines. The Real Estate sector has received special attention from FTA. It is the right time for the FTA to approach different industries and ask for their post
VAT implementation issues, and accordingly provide clarifications and guidelines so that proper compliance can be ensured.
FTA has done a fabulous job by creating an option to obtain clarifications using the clarification form. The
hotels can make use of this option to obtain guidance on issues encountered.
An Article by: Shahim Mukadam, Consultant (Tax & Advisory)