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Impact of VAT on Company Cash Flow in Dubai

As the saying “lifeblood”, cash flows denote it for all business. It acts as a wave for the smooth running of the business ocean. A cash flow report can help you to make critical management decisions for your business before it runs out of cash. It helps you to determine the areas to focus your business efforts to generate cash. As cashflows depict the flow of money in and out of business, profit just portrays the success of the business. A taxable business in the UAE is required to levy VAT on all the taxable supplies they make and to pay the collected VAT to the FTA. The tax that they have to pay to the FTA depends on the input VAT and the output VAT. The significant impact of VAT on company cash flow is associated with the turnover of the company. To bring a respectable idea of the cashflow comparing it with the VAT is a bit problematic as it is confined to a particular time period. Cash flow statements provide insight into the cash position of the company. It helps the company to take decisions on investments and debt partners. It should not be overlooked as a financial statement for comparison because it’s the cash summary of how well cash is spent and earned. Cash flow statements often imply the liquidity position, the ability to turn your assets such as investments, accounts receivable, and inventory into cash. An actual cash collection policy will lead to excess cash in business which is good for more investments. Your liquidity position tells potential creditors and investors whether your company is strong, stable, and has ample assets to face any situation. Frequent monitoring of your company’s liquidity position ensures up-to-date decisions that will increase your company’s profits and drive growth.

Effects of Vat on Each Area of Company Cash Flow 

When the VAT at 5% is charged, it will affect the production process and there will be an increase in the cost that will reduce the availability of resources. Eventually, it will reduce the ability to produce a large output of finished goods. This will affect the cash flow of the manufacturer. The lower sales due to lower demand and higher costs due to VAT on different stages of production may lead the manufacturer to make new decisions in the medium and long term. This impact of VAT on costs of production will lead many manufacturers to go for lower costs of raw material to compensate for the VAT percentage. This move will initially reduce the outflows i.e. the material costs. Lessening the outflow i.e. the costs and expenditures can also be attempted by seeking low-priced resources to complete the production process.

Regarding the financial decisions made by importers, the marginal cost of VAT can be salaried by seeking new export markets where the basic cost of goods and services are lesser. This will help sellers of imported output to engross the VAT on the general selling price and, as a result, control the negative impact on demand. On the other hand, the introduction of VAT may leave a positive impact on the cash flow of the company. As there are quarterly tax due dates for companies, the tax collected from their receivables in 30-day time or through cash sales remains with the company for 3 months before it is paid to FTA. This increases the availability of cash in the business within that period. Furthermore, as Input VAT is charged and needs to be calculated, the business becomes more aware of its purchases and maintains proper management of its payments. This results in control of the cash outflow leaving a positive net cash flow.

Need for Tax Planning 

What is Tax Planning?

Tax planning is an effective and efficient means to find out how much cash you pay as tax and how to reduce the tax liability to the FTA through allowances, deductions, exclusions and exemptions.

Tax planning helps: 

  • To achieve your business goals and growth
  • To control when taxes are paid and reduce the amount of taxable income
  • To manage tax bills and double taxation can be avoided if there is a global business.
  • To budget on tax payments and to keep an eye on cash flow shortages.

Need for Cash flow in business

Cash inflow is the life force of your business and it comes from sources like customer payments, loan receipt, interest on savings or investments, etc. It is the net change in your company's cash position from one period to the next. Positive cash flow puts you in a better stable position with better buying power. 

  • Flexibility : Strong cash flow provides better flexibility to your business when you confront evolving problems or making crucial decisions. You can confidently make critical purchases in the near future if your cash flow is strong. Strong cash flow can also strengthen the bond between the company and its owners and makes your business more appealing to any lender if you want to get new debts. It can also attract new buyers.
  • Debt Management : Effective cash flow helps you manage your debts in a better way. Essentially, you need a positive future cash flow to pay for your debt commitments. Businesses usually have long-term loans and short-term loans with vendors, that require monthly payments. These payments on a regular basis will restrict your free cash flow.
  • Growth : Strong positive cash flow helps a business to invest in growth. Constructing new places, investing in research and development, renewing infrastructure, improving technology, etc. can make your business grow and improve with strong positive cash flow. It can help your company operate in a strategic and practical way.

Role of CDA Team

CDA is a team of professionals who are expert in VAT-related services and have the proficiency to manage your company’s cash flow in a better way. And helps to maintain strong liquidity of your cash position.

  • We thoroughly analyze the structure of your company and suggest better strategies to improve your cash flow.
  •  Our in-depth knowledge and experience in VAT can effectively manage your company cash flow and lead your business to success.
  • Assist new startups in maintaining a positive cash flow by calculating their Net Vat and planning for the tax payment on the correct due dates hence avoid shortages of cash. 
  • We help companies to register for VAT and ensure that VAT is correctly charged to the appropriate sales and purchase invoices without any omissions.

CDA Accounting & Bookkeeping Services LLC also provides CFO Services, Accounting & Bookkeeping Services, Accounting Software services, Auditing Services, Due Diligence Services, and Tax Filing & VAT Consultancy services.

Want to know anything regarding the impact of VAT on company cash flow? Feel free to contact us. Our experts offer you a one-hour free consultation to drive away your doubts!

Frequently Asked Questions [FAQ]

1. In the case of a temporary transfer of goods to complete manufacturing, will it negatively affect my cash flow?

Where the goods are transferred temporarily from domestic market to a designated zone or outside the State in order to complete the manufacturing or repairing of the goods and then re-imported into the State, the value of the re-imported supply shall be the incremental value.

2. Is the payment of tax to FTA a cost to the company?

No, it is not a cost until it is considered a business expense.

3. Would proper tax planning help in managing cash flows?

Yes, ineffective tax planning, cash flow of a company can be made positive in the following ways:

  • Follow up for all the purchase bills and refund the input tax in the same tax period
  • Claim all the business-related input tax
  • Maximise the collection of sales with the proper receivable department
  • Get maximum credit period from sundry creditors

4. If payment to creditors is delayed, how would the impact be on cash flows?

Ideally, it is not recommendable to delay the payment for creditors considering company creditworthiness and goodwill in the market. Justifiable delay will add strength to cash flows.

5. If the goods are issued by the delivery note, is there any grace period to issue a tax invoice?

Tax invoice is to issued within 14 days from the date of the delivery note.

6. I have issued the tax invoice at the time of delivering services, but at the time of tax due date, payment has not been received. Am I liable to pay the tax on invoice to FTA?

Yes, once you raise a sales invoice, you are liable to make the tax payment. If the amount has not been received after 6 months, you could claim back through bad debts adjustment.

7. Do we need to submit voluntary disclosure if I have bad debts to claim back for non- payment from customers?

No, it can be adjusted through the adjustment column in VAT 201 Form. For a Voluntary disclosure, there would be a fee of AED 3000.  

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