Value Added Tax (VAT) is an important part of the tax system in the United Arab Emirates (UAE). Introduced in 2018, the current standard UAE VAT rate, applied to most goods and services, is 5%. There is also a 0% rate, which applies to a limited number of goods and services.
Businesses must register for VAT if their turnover exceeds the threshold set by the UAE Federal Tax Authority (FTA), which is currently AED375,000 (c. USD100,000). However, there are circumstances when a business might want or need to deregister for VAT. This article will set out the process, the reasons for deregistration and the implications of doing so.
Why Deregister from VAT?
Deregistering from VAT can be beneficial under certain circumstances, but it’s essential to make this decision strategically.
Changes in your business structure or your business activities may require or make deregistration advantageous.
If your business ceases trading or no longer engages in taxable activities, it is a mandatory requirement to deregister for VAT. It is important to deregister promptly to avoid unnecessary administrative burdens and potential penalties for failing to comply with VAT regulations.
A business must notify the FTA by submitting an application for deregistration from VAT within 20 business days from the date of occurrence of any of the following events that require deregistration under Article 21 of the VAT Law:
- The business is no longer making any taxable supplies.
- The business is making taxable supplies over a period of 12 consecutive months but below the voluntary VAT registration threshold of AED187,500.
- The business may choose to apply for VAT deregistration on a voluntary basis if it is making taxable supplies over the past 12 months that are above the voluntary VAT registration threshold of AED187,500, but below the mandatory registration threshold of AED375,000.
The VAT Deregistration Process
Generally, a VAT deregistration application involves the following steps:
- Submit a VAT Deregistration application on the FTA portal, providing accurate reasoning, the effective date for deregistration, and uploading all relevant supporting documents.
- Submit the final VAT return as notified by the FTA after reviewing the deregistration application.
- Settle all outstanding liabilities with the FTA, including any pending penalties, or submit a refund application if the company is in a credit position at the time of deregistration submission.
Once the application for VAT deregistration is submitted to the FTA:
- The application will be reviewed. If additional information is required, the FTA will notify the company via email. The company will then need to provide the additional information and resubmit the application.
- The FTA reserves the right to initiate a tax audit upon receiving the deregistration application. The company must provide the necessary details as required by the FTA to fulfill the tax audit requirements.
- Once the VAT deregistration application and any tax audit (if so requested) have been reviewed and approved by the FTA, the company will be required to file the final VAT return within the prescribed time limit provided by the FTA and complete payment of any outstanding liabilities.
The estimated time for the FTA to complete the application process is generally 20 business days from the date on which the completed application is received. However, if additional information is required, the FTA may take more time to process the application.
Late VAT Deregistration and Applicable Penalties
If the registrant fails to submit a deregistration application within 20 business days, as specified by the Tax Law, a penalty of AED1,000 will be imposed, with an additional AED1,000 per month for each subsequent month of delay, up to a maximum of AED10,000.
How long should I maintain VAT records?
Even after deregistering, business owners should maintain their records and books of accounts for a period of at least five years from the end of the financial year to which they belong. This includes VAT invoices, receipts, and any correspondence with the FTA. These records are crucial in case FTA needs to review your past VAT transactions or if you are audited.
Records and books of accounts related to capital assets like machinery and furniture should be maintained for at least 10 years from the end of the tax period to which they belong.
Records related to real estate should be maintained for a period of at least 15 years from the end of the tax period to which they belong.
What is the impact of VAT Deregistration?
No VAT Charges
Not charging VAT on your sales could make your products or services cheaper for customers who are not VAT-registered. But you will also not be able to reclaim VAT on your business purchases, potentially increasing your costs. This could impact your pricing strategy significantly.
Simpler Administration
Deregistration reduces the administrative burden, which can lead to substantial savings in time and resources.
Impact on Cash Flow
Losing the ability to reclaim VAT could affect your cash flow and overall profitability. Business owners should therefore review their financial planning and budgeting.
Changes in Pricing
For customers that are VAT-registered, the inability to reclaim VAT on their purchases might impact on your pricing competitiveness.
Market Perception
Deregistering from VAT might affect how your business is perceived in the market. It is therefore important to communicate the reasons for your decision to clients.
How can Sovereign Assist?
Before deregistering for VAT, it is essential to evaluate the financial and operational impacts on your business. You should always consult with a tax professional to ensure you are making an informed decision that aligns with your business goals.
Sovereign can assist as follows:
- Support in analysing whether the taxpayer is eligible for VAT deregistration.
- Support in the submission of the VAT deregistration application.
- Support in submitting the final VAT return.
- Assistance in fulfilling the requirements of the FTA’s tax audit resulting from the VAT deregistration application.
- Assistance in applying for a VAT refund and the associated tax audit if the taxpayer is in a credit position.
- Liaising with the tax authorities to effectively manage the end-to-end process.
