Reverse Charge Mechanism (RCM) shifts VAT liability from the supplier to the recipient. In UAE, RCM applies to imported services, certain imported goods, and supplies between mainland and designated zones. You record both output and input VAT in the same return — usually net-zero unless you have partial recovery.
When does RCM apply?
UAE VAT executive regulations specify three core RCM scenarios:
- Imported services — services supplied by a non-UAE supplier to a UAE recipient (SaaS subscriptions, foreign consulting, etc.)
- Imported goods where VAT wasn’t paid at customs — direct-shipped low-value items, free-zone-to-mainland transfers
- Designated-zone supplies — specific intra-DZ and DZ-to-mainland flows under cabinet decisions
If you pay an invoice from any non-UAE vendor (Slack, Notion, AWS, Adobe, foreign agencies), it’s almost certainly an RCM transaction. Most SMEs miss these for months.
How to record RCM in your books
The first entry is your RCM accounting — both input and output on the same line, net-zero impact on cash. The second is the underlying expense itself, recorded normally.
FTA can assess output VAT on RCM transactions you missed AND deny the corresponding input recovery. Net effect: you pay 5% twice in penalty assessments. Voluntary disclosure mitigates.
| Entry | Debit | Credit |
|---|---|---|
| Recognise input VAT | Input VAT (5%) | Output VAT (5%) |
| Recognise expense | Expense (gross of VAT) | Vendor payable |
5 imports most SMEs miss
- SaaS subscriptions — Slack, Notion, Adobe Creative Cloud, AWS, GitHub, Calendly. AED 1,500/month of these = AED 900/year of RCM you should record
- Foreign consulting / advisory — international law firms, design agencies, recruiting consultants
- Marketplace platform fees — Stripe, Calendly Premium, Zoom Pro, Google Workspace
- Inter-company services — payments to a foreign parent or sister company for management fees, IP licensing
- Low-value direct-shipped imports — small parcels under AED 1,000 that escape customs VAT
RCM in your VAT 201 return
For full-recovery businesses (most), the entries net to zero VAT impact. For partial-recovery sectors (financial services, residential rent), you can only recover input proportionally — RCM creates real cost.
- Box 3 — supplies subject to reverse charge (your output VAT under RCM)
- Box 9 — recoverable input VAT, including the matching RCM input
Building an RCM audit defence
If FTA audits you, the RCM evidence pack should include:
- Vendor invoices showing the foreign supplier address
- Proof of payment to the foreign vendor
- Internal memo classifying the supply (service / goods / inter-company)
- Journal entries showing both output and input VAT recorded
- RCM tracker spreadsheet (we provide a free template)
Get our free RCM tracker
Excel template that catalogues every RCM transaction with output/input entries and audit-trail notes.
Frequently asked questions
What is reverse charge mechanism in UAE VAT?+
It’s a mechanism where the recipient of a supply (not the supplier) accounts for the VAT. Used for imported services, certain imported goods, and DZ supplies. Both output and input VAT are recorded in the same return.
Do I pay extra VAT under RCM?+
For full-recovery businesses, no — output and input cancel out. For partial-recovery sectors, you may pay net cost on the non-recoverable portion.
Is buying SaaS from abroad subject to RCM?+
Yes. Slack, Notion, AWS, Adobe — all foreign SaaS subscriptions are imported services and trigger RCM in your next return.
What happens if I miss RCM transactions?+
FTA audits routinely catch these. They assess output VAT on the supply and may deny input recovery — effectively a 10% hit. Voluntary disclosure reduces penalties.
How do I track RCM transactions?+
Most accounting tools (Zoho, QuickBooks, Xero) have RCM tax codes. We provide a free Excel tracker as backup. Tag every non-UAE vendor invoice as RCM.
Are mainland-to-free-zone supplies subject to RCM?+
Some are, depending on the free-zone designation and supply type. Designated-zone goods supplies are often out of scope; services are typically standard. Each case needs review.