How will VAT impact UAE's hotel operators

Hotels already have a 10 per cent service charge and a 10 per cent municipality fee to their room rates in Dubai.

The UAE is one of the countries in the GCC ahead of the curve when it comes to hospitality investment. Like I said in my previous column, hospitality revenue in the UAE is forecast to increase by 10.8 per cent annually from last year to $9.8 billion by 2020 and the government's spending on the sector's development is expected to grow by 2.2 per cent this year and by 4.3 per cent over the next decade.

Ordinarily, the development of the mid-market sector has always been a priority for the UAE government as it accounts for 51 per cent of overall hotel rooms, and therefore, any negative impact from VAT is a legitimate concern.

The sector has two types of customers, business-to-business (B2B) and business-to-consumer (B2C). It is expected that most of the B2B customers fall in the category of 'VAT registered business' and thus the VAT should not have any expenses cost. However, it is planned that there will be a block on input VAT deduction on business and entertainment expenses.

For the B2C customers, there may be a minor impact as this will only mean that their offering is five per cent more expensive. However, clarity is still needed to be sought whether the calculation basis will be from the net sales prices, which is the most common practice in other jurisdictions with VAT or on top of the other fees, for instance, municipality fees.

As you are aware, currently, hotels already have a 10 per cent service charge and a 10 per cent municipality fee to their room rates. Serviced apartments also have a room tax of Dh15 per day for four-star hotels, while Dh20 per day is added to five-star properties. In this case, do you really want another five per cent on an already 20 per cent levy plus room charges?

The government needs to strike a fine balance and make sure they do not levy the industry with too many extra costs, otherwise it may impact the consumer and may lead to a plunge in demand.

Looking from the supplier perspective, things can be more complex as the major supplies can vary from zero-rated, exempt and normal rated goods and services. Due to the nature of the sector, it will almost be impossible to narrow down the suppliers to certain categories. To add to this complexity, the suppliers for an organisation can be domestic, within the GCC and outside the GCC. Therefore, it is crucial that the purchasing and accounts payable function within the respective companies be fully aware of the VAT impact for each arrangement which they will or currently have with the suppliers.

In larger hospitality organisations, it is a must to automate the purchasing processes to minimise potential human error in the VAT returns. Due to this additional administrative burden, the industry may pass the cost to the final consumer in the net sales price.

No doubt, the income stream from VAT is going to be valuable to the country, but on the other hand, it's important that the government makes sure the tariff is not going to have a reverse effect, by dampening demand and putting a dent in its strategic roadmap of attracting 20 million visitors per year by 2020.

The writer is Crowe Horwath's VAT services team leader. Views expressed are his own and do not reflect the newspaper's policy.