If you run an online store in the UAE, you’ve probably found yourself asking practical questions like whether you need to register for VAT yet, whether you should be charging 5% on every order, how exports or sales to Saudi customers are treated, how to account for Shopify subscriptions, Meta ads, or Amazon marketplace fees, and why the amount hitting your bank account doesn’t seem to match your actual VAT liability.
VAT in e-commerce isn’t always straightforward. Between cross-border sales, imported digital services, marketplace deductions, and customer returns, it’s easy to make mistakes that affect your cash flow or trigger penalties during an FTA review. This guide breaks down the exact steps you need to set up your VAT accounting properly
Steps to setup VAT accounting for your e-commerce business
Below is a practical, implementation-focused breakdown of what you need to set up in your accounting system to comply with UAE VAT regulations.
Step 1: Classify your sales correctly
Start by identifying the different types of supplies your business makes. Not all online sales are treated the same for VAT purposes.
You should clearly separate:
- Domestic UAE sales (5% VAT)
- Zero-rated exports (0% VAT)
- GCC cross-border sales (B2B vs B2C treatment)
- Digital services vs physical goods
Each category must be mapped correctly in your accounting system to ensure accurate VAT reporting. Misclassification at this stage leads to incorrect VAT returns.
Step 2: Configure VAT rates at product or service level
High-volume e-commerce businesses cannot afford manual VAT adjustments.
Your accounting system should:
- Assign VAT rates at the item level
- Automatically apply 5% or 0% based on supply type
- Maintain separate ledgers for output VAT and input VAT
- Distinguish taxable, zero-rated, exempt, and out-of-scope supplies
This prevents calculation errors and ensures consistency across invoices.
Step 3: Record imported services under reverse charge
If you use foreign service providers (e.g., Shopify, Meta, Google, AWS), you must account for VAT under the Reverse Charge Mechanism (RCM).
For each imported service:
- Calculate 5% VAT on the invoice value
- Record it as Output VAT under reverse charge
- Simultaneously claim it as Input VAT (if recoverable)
Your system must track these entries separately, so they appear correctly in your VAT return.
Step 4: Account for marketplace settlements properly
If you sell through Amazon, Noon, or similar platforms:
- Record gross sales, not just net settlements.
- Declare Output VAT on total sales value.
- Record marketplace commissions and fees separately.
- Claim Input VAT on fees where VAT is charged.
Do not rely solely on the bank credit amount, your VAT liability is based on sales, not settlements.
Step 5: Implement a clear returns & credit note process
Returns are part of e-commerce operations. Every return must be backed by proper documentation.
When a return happens:
- Issue a Tax Credit Note
- Link it to the original invoice
- Adjust Output VAT accordingly
Without this, you may overpay VAT on cancelled transactions.
Step 6: Maintain export & compliance documentation
For zero-rated exports, documentation is critical.
You must retain:
- Commercial invoices
- Shipping documents
- Customs clearance evidence
Without valid proof of export, the FTA may reclassify the sale as standard-rated, increasing your VAT liability.
Step 7: Reconcile before filing your vat return
Before submitting your VAT 201 return:
- Reconcile sales reports with accounting records
- Match input VAT claims with valid tax invoices
- Review reverse charge entries
- Verify credit notes issued during the period
Regular reconciliation reduces errors, protects input tax recovery, and prepares you for potential audits.
By setting up your VAT accounting properly from the outset, classifying supplies accurately, recording reverse charge transactions, accounting for marketplace settlements correctly, and maintaining supporting documents, you reduce risk, protect cash flow, and avoid costly penalties.
A well-configured VAT system doesn’t just keep you compliant; it gives you clarity over your true margins and financial position. And in a fast-moving e-commerce environment, that clarity is a competitive advantage.
