VAT is a tax borne by the final consumer, who pays it to the taxable person selling the goods or services consumed. The taxable person, therefore, acts as a tax collector on behalf of the state. There is no choice in the matter: it’s the law. In this way, the state subcontracts a sovereign function to private operators, creating a highly imbalanced contract.

Taxable persons must determine whether their transactions are subject to VAT or exempt, which is far from straightforward. If subject to VAT, they must also figure out the applicable rate: 3%, 8%, 14%, or 17%. To declare and pay the tax, they need to file VAT returns--sometimes more than 24 per year--a task that is often outsourced due to its time-consuming nature.

And what if the taxable person makes a mistake? The consequences can be severe. If the taxpayer has collected too little tax (for example, applying a 3% rate instead of 17%, or incorrectly applying an exemption), the government will still collect the underpaid amount from the taxable person, reducing their profit margin.

In case of mistake, the taxpayer may face penalties: a fine of up to €10,000 or up to 50% of the incorrectly deducted or unpaid tax. It doesn’t matter if the mistake was made in good faith, as the Registration Duties, Estates and VAT Authority (AED) interprets the law as not requiring fraudulent intent. If VAT is not paid on time, the AED may issue a summons to the taxpayer or even to a third-party holder. Interest will be charged on the outstanding debt at a rate of 7.2% per year.

The manager may be personally liable for the tax--this is referred to as a guarantee call. The manager’s situation can quickly become dire, leading to legal mortgages and enforcement actions, and the available legal remedies are sometimes difficult to pursue.

In exchange for what do entrepreneurs accept this role? Nothing. It’s an unimaginable position: the VAT taxable person bears all the risks and none of the rewards. A reality that no entrepreneur would accept in the context of a private contract.

This raises the question: what happens when the taxable business is partly owned by the state? If VAT law considers that “the performance of a service under the law” falls within the scope of VAT, and since taxable persons must invoice their services at their normal value when dealing with related parties, shouldn’t such a business invoice the state for this service, which consists of acting as a tax collector? Given the costs and risks involved, the bill would be substantial--and subject to VAT.

Beyond this joke, these few points remind us of an important reality: VAT is a tricky subject that poses real risks for taxpayers. Above all, their obligations are not limited to a “tick-the-box” exercise consisting simply of filing returns on time. Here, being well supported before appears to be essential to avoid problems after.

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