Why SMEs are important to any economy

Successful businesses help economies to thrive. What if the scale of the business was taken into consideration? Do SME’s really make an impact on the economy? 

For a growing economy, businesses should be of great value. In theory, if you think larger the business module higher the value towards the economy – think again. Let’s look at some of the most crucial factors that add value to a business, regardless of their scale, and see how SMEs deliver in each case.

Adaptability and quick response

In an ever-changing economic climate, agility and adaptability are what separates a considerable loss or a gain.

Timing is everything. Micro-businesses have their owners working on the front lines of their businesses’ while the contrary has the influential decision-maker detached from the customer experience resulting in late response to trends alongside slower decision making. Thus, SME’s are better at identifying and embracing new trends in the industry, than their larger, more complex rivals.

Customer loyalty

Don’t get us wrong. Large enterprises provide the greatest convenience. But in an attempt to serve a larger audience, they tend to over-generalize their scope. Focusing on impressing and paying off (rich and possibly foreign) shareholders than delivering customer needs causes them to loose on customer loyalty.

Small businesses, on the other hand, are all about customer service, loyalty, and giving back to the community while specializing in the areas of service provided. 

Local Engagement

Small sector occupations provide opportunities to many capable and potential entrepreneurs who are deprived of appropriate opportunities. Together with the element of low risk in SMEs attracts a higher growth in employment. SME’s help releases scarce capital toward productive use of the community and empowers a strong middle class and emerging lower class, reducing wealth gaps.

Community Identity

Due to their uniqueness and rarity, SME’s helps in the creation of localized value, creating an identity to the local areas, unlike highly branched and overly mainstream businesses. Customers don’t always prefer mainstream, especially tourists, whose sole purpose of travel is to seek unique experiences. SME’s, therefore, act as a linkage institution between citizens, tourists, entrepreneurs and city officials strengthening community relationships, unlike any other module. 

Diversity

Small businesses also have more flexibility, and can be started by almost anyone. That makes them more diverse in form, function, culture, and potential than large corporations. The greater diversity we have in the economy, the easier it is for the economy to withstand tough conditions.

It is made pretty clear that SME’s provide occupations of greater value than other entrepreneurship schemes, thus helping a country’s economy. In developing countries, they account for 60% of GDP and over 70% of employment. While in developed countries, they provide a crucial contribution to mature economies – especially ones hit by negative growth and stagnation.

Small businesses and startups are what keep our economy strong, if you’ve ever considered starting a business, know that there is no “perfect” time, you have to take the plunge at some point. Entrepreneurs like you are what keep the market alive.

If you are interested to change your life with business opportunities, our SME consultants can show you many ways to start your business. Please contact us through our website info@crevaty.com  

Conditions to claim input VAT in UAE

Things that you need to know before claiming input tax

It is possible to recover all input tax based on invoices? No.

This article we provide an overview of conditions to claim input Tax in UAE. VAT is an indirect tax govern by public (Government) which is imposed on goods and services at each stage. You need to fulfill certain conditions when you recover VAT as input tax.

Tax paid on the procurement’s / expenses is referred to as input tax. Unless otherwise specifically mentioned under the Decree Law UAE, the credit of such input tax shall be available to the registered person subject to fulfillment of prescribed conditions.

If you are not registered for VAT, you are not able to reclaim VAT on goods or services.

If you are registered for VAT, the general rule is VAT can be reclaimed on goods and services bought by the business to make standard, or zero – rated supply. Below conditions should be met,

  1. Recipient must be a registered person for VAT under UAE federal Tax Law.
  2. The recipient obtains and also keeps the tax invoice as specified in Executive regulation on Federal Decree-Law.
  3. The goods or services must have been acquired for an eligible purpose and used or intended to consume for make taxable product. (Exempt supply businesses cannot recover input tax, personnel expenses cannot recover input tax, entertainment expenses cannot recover input tax)
  4. The amount of VAT which the recipient seeks to recover must have been paid in whole and part, or have been intended to be paid. (Time frame to claim input tax)

Let us go into detail to understand on item 2,3 and 4 sated above. Item 1, is simple.

1. Registered person

The Taxable Person issued with a TRN (tax registered number)  by FTA considered as registered person or Registrant If someone need to verify person/business is registered for VAT, they can log in to  https://tax.gov.ae/ and enter the TRN and verify. This option is available to public to any TRN.

2. Tax Invoice

A Tax Invoice shall contain specified particulars in order to qualify as recoverable input tax invoice. Below is the content of full tax invoice as per the Article 59 of the Executive Regulations with regards to tax invoices.

  • The words “Tax Invoice” clearly displayed on the invoice.
  • The name, address, and Tax Registration Number of the Registrant making the supply.
  • The name, address, and Tax Registration Number of the Recipient where he is a Registrant.
  • A sequential Tax Invoice number or a unique number which enables identification of the Tax Invoice and the order of the Tax Invoice in any sequence of invoices.
  • The date of issuing the Tax Invoice.
  • The date of supply if different from the date the Tax Invoice was issued.
  • A description of the Goods or Services supplied.
  • For each Good or Service, the unit price, the quantity or volume supplied, the rate of Tax and the amount payable expressed in AED.
  • The amount of any discount offered.
  • The gross amount payable expressed in AED.
  • The Tax amount payable expressed in AED together with the rate of exchange applied where the currency is converted from a currency other than the UAE dirham.
  • Where the invoice relates to a supply under which the Recipient of Goods or Recipient of Services is required to account for Tax, a statement that the Recipient is required to account for Tax, and a reference to the relevant provision of the Decree-Law.

3. Eligible purpose

Every business has certain common business expenses which are incurred on a day to day basis. All are not qualified claim input tax.

The expenses on which input VAT recovery is blocked can be categorized as per below.

  • Entertainment expenses
  • Motor vehicle used for personal purpose
  • Expenses incurred on exempt suppliers
  • Some employee related payments

We can briefly explain these categories as follow,

Entertainment expenses

VAT incurred on any costs which are used for a genuine business purpose, or which are incidental to a business purpose e.g. food and drink provided during a business meeting, shall be recoverable (subject to normal VAT recovery rules). However, where the hospitality provided becomes an end in itself and could be construed as the purpose for attending an event, such costs will be considered to be entertainment in nature and the VAT incurred shall not be recoverable. The type of entertainment expense which is not allowed for input VAT recovery include hospitality (Examples: Accommodation, food and drinks) which in not provide in normal course of meeting, access to shows or events, trips provided for the purpose of pleasure or entertainment. To understand more on the concept, FTA has issued guideline through public clarification. You can refer the same though this link – https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/05-VAT-Entertainment-Services.pdf

Motor vehicle used for personal purpose

In general, a person registered under VAT is allowed to recover VAT incurred on the purchase, lease or rental of a motor vehicle which is used for their business activities. However, Motor vehicle is used for the personal use of person in the company, it cannot be claimed VAT on expenses relating to motor vehicles and fuel expenses.

Here, a ‘motor vehicle’ is any road vehicle which is designed or adapted for the conveyance of no more than 10 people, including the driver. ‘Motor vehicle’ does not include a truck, forklift, hoist or other similar vehicles. This rule ensures that the VAT incurred on essentially commercial vehicles is not blocked due to incidental private use.

A motor vehicle will not be treated as being available for private use if it is within any of the following categories,

  • A taxi licensed by a competent authority
  • A motor vehicle registered and used as an emergency vehicle, including by the police, fire brigade, paramedics, or similar emergency services
  • A vehicle which is used in a vehicle rental business where it is rented to a customer

Expenses incurred on exempt supply

Some of the selected supplies in the sectors categorized as exempt supply under UAE VAT law and treat as outside the scope of VAT. Examples of some financial Services, Sale or rent of residential buildings following the first supply, supply of bare lands, local passenger transport services etc. In such cases, input related exempt supply will not be able to recover. This area is complex and need to review case to case where most of the cases it will come under mixed supply and need special tax recovery calculations.

Some employee related payments

VAT paid on employees related expenses will not be recoverable by the business where the goods and services are purchased to be used by employees for no charge to them and for their personal benefits.

Above rules are not applicable following situation,

  • Where the employer has a legal obligation to provide those goods or services to the employees under and applicable UAE Labor low.
  • Where it is a contractual obligation or documented policy of the employer to provide those goods or services to employees, to enable them to perform their duty, and where it can be proven to be normal business practice to do so in the course of employment.

Example – VAT paid on Medical insurance on behalf of staff and their dependence need to evaluate accordingly. Not all the cases can claim full input tax on the same.

4. Time Frame to claim input tax

Input tax must be recovered in the first tax period in which two conditions are satisfied,

  • The tax invoice is received
  • 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

Upon receipt of a tax invoice, you can recover input tax only when an intention to make the payment within a prescribed period is formed. Hence, planned payment period is very important before you claim any input tax. Where a taxable person fails to make the payment of consideration before the expiration of six months after the agreed date of payment, the taxable person should reduce the input tax in the VAT Return of the tax period following the expiry of the six-month period. However, once the payment is made, the taxable person will again be entitled to recover the input tax.

For an example, if a company receive a tax invoice for AED 10,500 on 30th May 2020 and agreed to pay within 30 days. Hence payment due date is 30th June 2020 and the company claim its input tax of AED 500 during the tax period of 01st of April 2020 to 30th June 2020. However, if company fail to make the payments until 30th December, 2020 then the eligibility of claimed input tax of AED 500 is invalid. Hence, adjustments need to made after the 30Th December, 2020 in the tax return to reduced AED 500 in the input tax. Again, once the company made the payment in later period, it is allowed to claim input tax again after the payment.

Due to the time frame of input tax claim, companies must review age payable list with the due dates/ agreed payment dates with suppliers to closely review the eligibility of input tax claimed in earlier periods. FTA clarify time frame to claim input tax under the public clarification and please refer the same through the link https://tax.gov.ae/-/media/Files/FTA/links/Public-Clarification/Time-frame-for-recovering-Input-Tax.pdf

Conclusion

VAT registered companies are responsible for VAT. They are eligible to set off their output VAT (Sales) with Input VAT (Expense). Companies cannot claim all input VAT and need to evaluate the eligibility on the same.

Hope this will help you to get understating on conditions to claim input tax in UAE. If you need help, please contact us through www.crevaty.com

Internal Audit – is more than what you think

The severity of the current global economic downturn has left organizations around the world searching for ways to contain costs, improve efficiencies, maintain customer satisfaction levels and protect their balance sheets. This unprecedented economic crisis has been nothing short of an urgent call to action for more robust risk management practices in global organizations of every size and industry.

In retrospect, the role of the internal audit (IA) function may have been somewhat ignored in the economic storm. As organizations struggle, we see more of them recognizing that IA is positioned to play a critical role in helping to manage the change that must come. These organizations are looking to IA to provide assurances that existing and emerging risks are identified, monitored and managed so that they can move forward with confidence in executing their business model. This issue explores how IA can contribute to organizations as they recover from the crisis and what management and boards should expect of IA going forward.

However, let’s begin with what exactly is an IA.

Take a fresh look at the role of IA

The role of an IA is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.

When done right, an IA will answer to questions like whether you have any gaps in your company policies and procedures, does you company meeting compliance goals, comply with laws and regulations and much more. Plus, it will provide you with useful insight into your organization’s culture, policies, procedures and more.

The process involves the board of directors or the board of trustees, the accounting officer or the audit committee. And the evaluation and reporting will be done to the highest level in the organization.

Let’s have a look at why IA are essential for an organization.

Why IA are essential for an organization?

Increase in productivity 

The goal of IA is to add value and improve the operations of the company. Thus, it will help with strategic objectives achievements in an organization helping you with risk management, control, and other governance processes with its highly disciplined approach to evaluation. 

Confidence to stakeholders

One of the main benefits of IA for a company is the confidence it can bring to your stakeholders. Internal auditors report to the highest management of the organization on significant risks that they have evaluated with necessary improvements to improve the situation thus the administration and the boards can take necessary actions to ensure the company is being managed effectively on behalf of all stakeholders. 

Detection of frauds

Another important benefit of IA is it helps you uncover evidence of waste, fraud and abuse. Here you will have to be strategic of how frequent you need to do IA in each of your departments, as every department is different in nature. For example, manufacturing will need daily audits as for HR annual audits is sufficient.

Quality control

IA also play a crucial role in combining assurance and consulting. Here it helps with informing the management how effective the system, processes and procedures of the company are in keeping company goal achievement on track. And it also provides advice on room for improvements to attain better efficiency.

Good corporate governance

IA are also crucial in ensuring compliance with government laws and regulations, evaluating the internal controls such as corporate governance and accounting process.

When your internal control isn’t working as intended…

Internal controls are essential to manage business operations and to ensure the accuracy of your financial records. Yet many companies struggle with maintaining an effective internal control system. 

Top reasons for internal controls to fail

There can be many reasons for your internal controls to not to work. Here are the top 4 reasons for companies’ internal controls to fail.

01. Deliberate circumvention

Internal controls put limits for individual employees on what they can do. However, they can go around these limits through loopholes in your internal control system like by teaming up with other employees. To give you an example, your two employees can make fake cheques easily if one is allowed to enter cheques to the system and the other have clearance to print the cheques.

02. Incorrect judgement

Incorrect judgement on your employees’ character, skill set, competencies and loyalty to the company is one of the main reasons for internal control systems to fail. Here the main issue is management’s inability to assess employees’ character right and assign the right task for the right employee.

03. Failures to train employees

This is one of the most common reasons for company internal controls to fail. Lack of knowledge in their duties, limitations, the consequences if they overcome these limits, general practices on how to uphold internal controls can massively affect the internal management system negatively. 

04. Management override

Control overrides are a common practice among organizations. And it is essential for the organization to carry out operations in certain circumstances – Like in an instance where you need to approve an invoice for AED 6000 when the person responsible for approving invoices over AED 5000 is on vacation, the other person may decide to skip certain steps in the process to approve the invoice. Although in this situation, it doesn’t affect the organization severely, it certainly affects the consistency of the internal control process.

How to assess internal control to optimize the internal control process?

Assess the control environment – Evaluating employee credentials related to performing controls is one of the best steps that you can take to optimize your internal control system. Here it would be best if you made sure employees have received adequate training and education to ensure their capability to maintain an effective control system.

Investigate control activities – The effective control system can translate to easily implementable policies and procedures. Here key control activities such as performance reviews, physical controls, informational processing controls, and segregation of duties should be taken in to account. 

Examine accounting information system – Efficiency of your accounting information system affect massively to the efficiency of your internal control system. Thus, checking the operational efficiency in data entry, record generation and report generation and reviewing the speed and efficiency is essential.

Evaluate the quality – Monitoring your internal control system when it’s absolutely necessary or for an audit is not enough to maintain an effective internal control system Thus; it’s important to put processes in place to encourage the management to monitor the system continuously. 

Rethink, revise and revalidate

Risk assessments are not static processes, they must be revised and revalidated to ensure they are relevant in a changing business environment. 

Risk assessment is the core of every IA function. A comprehensive risk assessment process will identify the organization’s existing and emerging risks, and help determine how these risks are controlled and where gaps exist within the operations of the business.

If you don’t know where to start your internal auditing process, our experienced internal auditors at Crevaty is here to help you. Get in touch with us today for more details.