The UAE’s Federal Tax Authority (FTA) issued a clarification over VAT liability pertaining to contracts issued last year, laying to rest residual questions over whether businesses or consumers are liable in such cases.

“The only case where consumers are directly responsible for paying VAT on received services that are delivered fully or partially after VAT went into effect, is where the contract, issued before 1 January 2018, states that the amount due is exclusive of tax,” the FTA said in a statement to media.

Earlier this year a dispute broke out between health club Fitness First and its members in the UAE, over VAT being applied to membership agreements signed and paid for last year.

Many members complained about requests from the company to pay the tax for the 2018 portion of their membership, even though they had already paid the cost of their membership according to Fitness First’s 2017 prices, which did not include VAT.

The dispute prompted Ahmad Al Zaabi, acting director of consumer protection at Dubai Economy, to clarify the rules.

“The agreement should state that the fee applicable does not include VAT or any of the tax concerned, and also specify that the merchant reserves the right to charge VAT or any other tax that may be implemented in the country at any point during the agreement period,” Mr Al Zaabi said in a statement in January.

If such terms are not stipulated, the contact will be considered “silent” and the merchant “cannot charge VAT from the consumers, or gain an accepted settlement with their consumers”.

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The statement on Saturday is the first time the FTA has issued formal clarification of the rules in such circumstances.

“Suppliers will be liable for VAT in two cases: if the contract states that the amount received against the good or service is inclusive of VAT; or if the contract issued to the consumer did not refer to VAT,” the authority said.

“In the latter case, if the recipient is registered for tax, the amount due is treated as exclusive of tax and the supplier would have needed to ascertain whether the recipient is registered and the recipient able to recover tax as per Article 70 of the VAT [executive resolution].”

In all cases, the supplier remains liable for accounting for the tax and paying it to the FTA, it added.

“Fitness First has been proactively engaging with the [authorities] to ensure we remain fully VAT compliant,” a spokesperson for the health club said at the time of the dispute.

The UAE introduced a 5 per cent VAT on 1 January and last month called on businesses who have yet to register for VAT to do so to avoid fines and legal proceedings.