VAT, it seems, has arrived in Dubai. And that has implications for business.

As of January 1 this year, VAT is now imposed in the United Arab Emirates (UAE) at the rate of 5% on all items other than basic food, health care and education. With Dubai being one of the seven emirates that makes up the UAE, this will have an impact on the many who do business there.

The six states of the Gulf Cooperation Council (GCC) – the UAE, Bahrain, Kuwait, Oman, Qatar and Saudi Arabia - agreed to introduce VAT as a way of raising $25 billion a year. It will effect both those states' economies and those who have dealings with them.

The UAE's Ministry of Finance has warned that businesses may need to make changes to their accounting procedures to manage the introduction of VAT. In response to queries about its implementation, the Ministry stated: "It is essential that businesses try to understand the implications of VAT now and once the legislation is issued, make every effort to align their business model to government reporting and compliance requirements."

When it comes to compliance, the issue of VAT and Dubai certainly require special attention. Of the countries in the GCC, Dubai has become arguably the most high profile and attractive for western businesses. While the risks associated with VAT are relevant to all GCC countries, Dubai's worldwide position is likely to see it emerge as the most likely target for what often accompanies VAT – VAT fraud.

Fraud

The situation in Dubai and the other states and UAE members that make up the GCC, is an echo of the UK in 1973, when it introduced VAT. It is fair to say that the 45 years since then have seen VAT used as a vehicle for fraud and the British authorities seeking to grapple with the problem. It has also, unfortunately, seen many innocent traders and companies become unwittingly involved in complex trading arrangements designed specifically by people looking to benefit from VAT fraud.

There is, therefore, much that those doing business in Dubai – and the rest of the UAE and GCC – need to know about VAT fraud. Only then can they avoid being implicated.

In the UK's experience, there was a time when expensive goods such as mobile phones, high-tech items and designer clothes were the favourites of those looking to commit VAT fraud in the European Union. Such items were imported VAT-free from EU countries, sold on at prices that included the VAT but the seller would then disappear before paying the VAT he received when selling the goods.

This practice was often made harder to detect by those involved creating the aforementioned complex trading arrangements. Often a number of companies were created to be part of a complicated trading chain and, sometimes, the goods would even be exported back to the EU, with the exporter reclaiming VAT that had never actually been paid.

The basic tactic with VAT fraud has always involved receiving the VAT on goods but never paying it to HM Revenue and Customs (HMRC). This was traditional tax evasion, or Missing Trader Intra Community (MTIC) Fraud, as it became known in such cases.

It was tackled by the UK government which, in 2007, levied VAT on the purchase – rather than the sale - of such high-value goods. This means that anyone importing such goods must now pay VAT on the goods immediately rather than when they sell them in the UK.

The change led to a fall in the recorded numbers of such frauds, as they became harder to achieve. But it was followed by a rise in VAT fraud in carbon credit trading. Once again, this was recognised by the UK government, which then changed the tax rules to prevent such fraud. It is an ongoing game of cat and mouse between those looking to commit the fraud and those looking to prevent it.

Precautions

What those trading in Dubai need to remember is that its VAT system is brand new. Its vulnerability to VAT fraud has, therefore, neither been properly tested by those looking to commit fraud or thoroughly assessed in practice by the authorities. That is why anyone who is, or plans to be, involved in legitimate business in Dubai or other GCC members needs to be careful. Globalisation certainly opens up business opportunities. But borders, especially those involving new taxation systems as in the GCC, can offer opportunities to those looking to make fraudulent gains. The crucial thing for those in business is to ensure they do not become involved in those efforts.

The new VAT system devised by these states will certainly be tested by those looking to use it for VAT fraud. Failure to make the most basic checks on who you trade with in the GCC states could lead to you becoming part of a complex VAT fraud trading chain of the type that was popular in the UK before the UK VAT changes.

If you are unsure of what precautions you should be taking, it is important that you seek legal advice before trading in these states. If you are investigated for involvement in an alleged VAT fraud you must – however innocent you are or however unwittingly you became involved - seek help from lawyers who specialise in fraud cases. Only they can assemble the right defence team, utilise the most appropriate experts, analyse the prosecution claims and negotiate, where possible, to obtain the most favourable outcome.

At Rahman Ravelli, we represent clients in cases involving hundreds of millions of pounds of alleged VAT fraud and a wide variety of commodities. Our experience means that we can say with certainty that the authorities do sometimes get it wrong when it comes to VAT fraud. But this does not automatically mean an innocent person will walk free from court – in any country.

If Dubai and its counterparts in the new VAT regime do start tackling what they perceive to be VAT fraud, anyone accused of it will need legal representation that can challenge the allegations and prove their innocence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.