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Co-Founder & CEO movingo
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Iakov Kukushkin
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Feb 06, 2026
- Reverse Charge Mechanism for VAT overview
- Benefits of RCM
- How Reverse Charge Mechanism works
- What are the requirements for the Reverse Charge Mechanism under UAE VAT?
- When Reverse Charge applies in the UAE
- Accounting treatment for Reverse Charge Mechanism
- Challenges of RCM
- Outsource your accounting and VAT with movingo
- Reverse Charge Mechanism FAQ
The VAT Reverse Charge Mechanism (RCM) in the UAE is a powerful compliance tool. For businesses that operate internationally or rely on foreign service providers, understanding the RCM is mandatory.
In this article, we will thoroughly explain what this mechanism is and how it functions, along with guidance on how apply to it correctly.
In this article, we will thoroughly explain what this mechanism is and how it functions, along with guidance on how apply to it correctly.
Reverse Charge Mechanism for VAT overview
The VAT Reverse Charge Mechanism (RCM) in the UAE is a special way of handling VAT, where the responsibility for accounting for VAT shifts from the supplier to the person who receives goods or services. RCM is used for cross-border transactions and ensures VAT compliance when the supplier is not based in the UAE.
Instead of the supplier adding VAT to the invoice, the buyer accounts for VAT themselves by declaring both output VAT and, if eligible, input VAT on their VAT return.
Instead of the supplier adding VAT to the invoice, the buyer accounts for VAT themselves by declaring both output VAT and, if eligible, input VAT on their VAT return.
📖 Check out more about VAT in the UAE in our handy guide.
Benefits of RCM
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Prevents tax evasion
RCM ensures that VAT is collected, even when the supplier is outside of the UAE tax system.. -
Simplifies foreign supplier obligations
Suppliers outside the UAE do not need to register for VAT solely due to these transactions. -
Improves cash flow
No VAT is paid to the supplier upfront. -
Efficient collection
VAT is collected directly from returns, not at the border.
From a business perspective, the RCM can be highly effective as it eliminates upfront VAT payments, which can tie up 5% of import or service costs until they are recovered. This can help companies that regularly import goods or receive foreign services improve their short-term cash flow, especially at scale, by hundreds of thousands of AED per year.
How Reverse Charge Mechanism works
The supplier issues an invoice without VAT
The invoice clearly states that VAT is subject to reverse charge
The recipient calculates the VAT that would have applied
The recipient:
- Declares the VAT as output VAT
- Simultaneously claims it as input VAT (if fully recoverable)
If the buyer can fully recover the VAT, the net VAT impact is usually zero, but reporting is mandatory. It's also key to get your books in order, as disorganized accounts can lead to hefty fines. Hiring a professional accounting firm will save you time and hassle while ensuring that you are complying with local regulations.
What are the requirements for the Reverse Charge Mechanism under UAE VAT?
- Recipient must be VAT-registered in the UAE
- Supplier must be non-resident or not VAT-registered in the UAE
- Supply must be taxable in the UAE
- Invoice must clearly mention “VAT under reverse charge”
- Recipient must report VAT in the correct VAT return period
- You need to prepare the proper documentation, such as contracts, invoices, and proof of supplier status
When Reverse Charge applies in the UAE
In the UAE, the reverse charge applies to specific scenarios defined by the Federal Tax Authority (FTA).
- Import of goods
- When a VAT-registered business imports goods into the UAE
- VAT is accounted for via the VAT return instead of being paid at customs, but only if certain conditions are met.
- Services received from non-resident suppliers
RCM applies when:
- The supplier is not registered for VAT in the UAE
- The place of supply is considered the UAE
- The recipient is VAT-registered
Common examples: consulting services, legal services, marketing and advertising, software subscriptions, management fees
- Specific domestic supplies
RCM also applies to certain local transactions, such as:
- Supply of precious metals and stones between VAT-registered businesses
- Certain transactions in the oil and gas sector
Accounting treatment for Reverse Charge Mechanism
In accounting, this mechanism works as follows:
- Output VAT is recorded as if the business made the taxable supply
- Input VAT is recorded simultaneously (if recoverable)
- Both amounts appear in the same VAT return period
Example:
A UAE company receives consultancy services worth AED 100,000 from a foreign supplier.
A UAE company receives consultancy services worth AED 100,000 from a foreign supplier.
- VAT at 5% = AED 5,000
- AED 5,000 reported as output VAT
- AED 5,000 claimed as input VAT (if eligible)
- Net VAT payable: AED 0
However, if the business experiences partial recovery, the unrecovered portion becomes a true cost. Calculations like that might seem simple, but there are many details and things that need to be considered for everything to go right. And you don't have to do it yourself, because it's hard and often expensive.
That's where outsourced accounting comes in.
That's where outsourced accounting comes in.
Challenges of RCM
As mentioned above, there are many nuances to accounting matters that need to be taken into account. The same applies to the RCM.
-
Compliance risk
Incorrect application or failure to report RCM can result in penalties. -
Complex accounting
Businesses must correctly identify RCM transactions and accurately report them in accordance with IFRS standards. -
Partial VAT recovery issues
Businesses with limited input VAT recovery may incur actual VAT costs.
Outsource your accounting and VAT with movingo
Accounting is essential for all businesses in the UAE, including freelancers. It is a legal requirement. However, hiring a professional accountant can be quite expensive, especially for self-employed individuals. Outsourcing this task to experts with extensive experience can be a wise choice in such a case. At movingo, we offer top-notch services starting at just AED 500 per month. This is a fraction of the average accountant's salary in Dubai, which is around AED 12,000.
Why don't we schedule a free intro call to see how we can help take your business to the next level with precision and clarity? We can handle the numbers while you focus on growing your business.
Reverse Charge Mechanism FAQ
The reverse charge VAT is calculated by applying the standard UAE VAT rate of 5% to the taxable value of the supply.
With the reverse charge mechanism, the supplier does not charge VAT.
VAT under RCM is reported in the same VAT return period as the following: output VAT (as if the business made the supply) and input VAT (to the extent that it is recoverable).
You may face administrative penalties and other legal troubles.
