With the introduction of VAT in Oman from 1 April 2021, small businesses should be well prepared even if they do not reach the registration threshold of OMR 35,000. This article discusses a few brief points which should be considered.
As many small businesses may not reach the turnover threshold for registration, they would think that they would not need to worry about registering for VAT. However, as there is an optional registration threshold, a small business may want to consider registering for VAT especially if they are paying significant amounts of VAT on their expenses and overheads. This would then allow them to recover VAT paid expenses especially if they have large ticket items such as rents and equipment.
As VAT is an indirect tax which is charged through the supply chain, there may be instances where a customer of a small business may require a VAT invoice when providing goods and services. In this situation, the business may have no choice but to register for VAT. To check if this situation arises, it is advised to contact all customers early in the process to understand how they are complying with VAT and if they will have a requirement for their trade partners to also have to register for VAT.
If, on the other hand, the business registered for VAT is supplying goods and services to non-VAT registered businesses, micro-businesses (businesses with revenue of less than OMR 19,250 per annum) or directly to the consumer, then a different set of factors will need to be considered. The fact that a customer will not be able to recover VAT will mean that when the business invoices them they will automatically receive a 5% increase on the goods and services, which they will not be able to recover. Again, communication is key to understanding who the affected customers are so they are prepared for this change. If communicating to the customers is not an option, then other options could be that prices are gradually increased coming up to the VAT implementation date so once VAT goes live, it can be dropped by 5% so the customer does not feel the impact of VAT. Exception to this rule is if customers are based overseas whereby no VAT would be charged. VAT on big ticket items for tourists would also not have an impact as they would be able to claim back any VAT paid upon departure.
If small businesses will be registering for VAT, then they would need to consider an accounting system to use which would enable the collection of information for the quarterly VAT return. If a business sends invoices manually or via Microsoft Word or Excel, then the administration process of VAT would be very cumbersome and would increase the amount of administration required. At Alpha Pro Partners, we recommend small to medium sized businesses to use the cloud based accounting software called Xero. It has strong security controls, invoices can be sent to customers at the touch of a button, and the process of the quarterly VAT returns can be automated.
A final point to mention, which is a crucial factor for small businesses, is cashflow. Why would VAT impact cash flow for a small business? In Oman where credit payment terms are notoriously known to be longer than 30 days, and if they even happen to be longer than 90 days, then there will be a cashflow issue. This is because the VAT returns are due every three months, which includes the VAT payments due to the government. If a small business cannot collect payment from goods and services supplied within this time period, then they will need to seek funding to be able to make the quarterly VAT payments. Therefore small businesses will need to ensure tighter controls on payments from customers and also ensure funding is in place in case they are not able to collect from customers within a 90 day period.
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This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.