The Effect of Value-Added Tax on Cash Flow in the UAE Small Business

Abstract

Purpose: The decision to implement Value-added tax (VAT) was issued as part of a set of necessary measures taken to protect the United Arab Emirates (UAE) economy and overcome the unprecedented financial and economic repercussions in the best possible way. However, the imposition of VAT for government revenues without any change in the nature of government spending was not sufficient to sustain the financial flows of UAE small companies. Based on that, this research aims to investigate the effect of VAT on the cash flow in the UAE small business.
Design/Methodology/Approach: The financial ratios that can be derived from the statement of cash flows can be classified in terms of purposes for revenue growth, operating margin, and capital efficiency. To achieve these objectives, a quantitative approach was adopted by distributing questionnaires to 1215 financial managers and accountants in small enterprises listed on the UAE economic department within five main sectors that are manufacturing, tourism, banking, real estate, and renewable energy. AS Statistical Package for Social Sciences (SPSS) was used to analyze the data extracted from the questionnaire, where means standard deviation, and t-test were conducted.
Findings: The results found that there is a significant impact of VAT on small companies in the UAE. As a result of the 5% VAT charge, there is a negative impact on the cash flow of the small businesses in the country. Moreover, the results of this study found both positive and negative impacts of the VAT on the business interests of smaller companies and the revenue collection of the UAE government. In addition, the results of the research showed that there is a statistically significant impact of VAT on revenue growth, there is a statistically significant impact of VAT on operating margin, as well as there is a statistically significant impact of VAT on capital efficiency.
Originality/value: The present research helps in listing out the benefits of implementing an appropriate VAT system in the UAE small business. In addition, the findings of the present research convey the potential for driving suitable changes in behavioral taxation and its opportunities and challenges, which helps in enhancing and positively shaping prevailing small business behavior. The theoretical value is summarized by the impact on the theories used in this research namely the social contract theory, the theory of tax harmonization, and the, social solidarity theory.
Contribution and Recommendations: Research contribution can thus be found in its capacity to provide light on how VAT affects small businesses' net operating cash flows and profitability in the UAE. Preparing a statement of cash flows serves the main purpose of giving relevant information on cash flow during the financial period, which helps lenders, investors, and other stakeholders assess and analyze the company's liquidity. Based on that, the researcher recommends making appropriate amendments to the procedures for applying the VAT to help reduce the complexity surrounding it and bring it to a state of clarity and simplicity for small companies in the UAE. This in addition to paying more attention to the elements of the cash flow statement because of their informational content is useful in identifying the financial situation of small companies in the UAE.