The UAE introduced Value Added Tax (VAT) in 2018 to diversify its revenue streams. Compliance with VAT laws is essential for businesses to avoid penalties, which can be significant. The Federal Tax Authority (FTA) enforces strict rules to ensure businesses meet their VAT obligations, from registration and filing to accurate reporting.
Below are the key VAT penalties as outlined under the UAE VAT law.
1. Failure to Register for VAT
UAE-resident businesses that make taxable supplies in the UAE are required to register for VAT if the value of their taxable supplies and imports in the previous 12 months exceeded the mandatory registration threshold of AED375,000, or is expected to exceed this threshold in the next 30 days.
Non-UAE-resident businesses that make taxable supplies in the UAE are required to register for VAT, regardless of the value of their taxable supplies and imports, where there is no other person obligated to pay the due tax on these supplies in the UAE.
Under Cabinet Decision No. (49) of 2021 on Administrative Penalties, such businesses are required to register for VAT within 30 days of exceeding the threshold. If a business fails to register within the stipulated timeline, it will incur a fine.
- Penalty: AED10,000 (c. USD2,750) for late VAT registration.
2. Failure to Deregister for VAT
If a business no longer meets the threshold requirements for VAT (i.e., it ceases making taxable supplies or it taxable supplies drop below AED187,500 annually), it must apply for VAT deregistration within 20 business days from the end of the month in which the event occurs. If a business fails to deregister within the stipulated timeline, it will incur a fine.
- Penalty: AED1,000 for the first offence and AED1,000 per month for each subsequent violation, up to a maximum of AED10,000.
3. Late VAT Filings
A registered person’s tax liability is the difference between the output tax payable for a given Tax Period and the input tax which is recoverable for the same Tax Period. Where the output tax exceeds the input tax amount, a payment of the difference must be made to the FTA.
Where the amount of input tax exceeds the amount of output tax, a Taxable Person is entitled to a refund of VAT from the FTA.
VAT returns must be filed must be filed within 28 days of the end of the relevant Tax Period. If a business fails to submit a VAT return within the stipulated timeline, it will incur a fine.
- Penalty: AED1,000 for the first offence, and AED2,000 for subsequent violations within 24 months.
4. Late VAT Payments
VAT payments must also be made within 28 days of the end of the relevant quarterly Tax Period. If a business fails to make a VAT payment within the stipulated timeline, it will incur penalties based on the outstanding amount.
- Penalty:
- 2% of the unpaid tax due immediately.
- 4% additional penalty if the payment is not made within seven days.
- 1% daily penalty after one calendar month, up to a maximum of 300% of the tax amount.
5. Incorrect VAT Return Submission
Submitting incorrect VAT returns, such as under-reporting VAT due or failing to account for VAT correctly, can result in substantial penalties.
- Penalty: The penalty for a first-time violation is AED3,000. If non-compliance is repeated within 24 months, the penalty increases to AED5,000.
6. Failure to maintain Proper Records
Businesses are required to maintain proper financial records related to VAT for at least five years. VAT records typically include invoices, receipts, bank statements and other documents that support VAT calculations. Failure to do so will result in penalties.
- Penalty: For the first offence, the penalty is AED10,000. If there is repeated non-compliance within 24 months, the penalty increases to AED50,000.
7. Failure to issue VAT Invoices
VAT-registered businesses must issue valid tax invoices for every taxable supply. Failure to comply with the rules and regulations concerning the issuance of electronic tax invoices may incur a penalty.
- Penalty: AED5,000 per missing invoice.
8. Failure to comply with procedures and conditions for transfer of goods in Designated Zones
Businesses must comply with procedures and conditions for transfer of goods in Designated Zones, as stated in the UAE VAT law. Failure to adhere will incur penalties.
- Penalty: The penalty will be higher of either AED50,000 or 50% of the tax, if any, unpaid on the goods as result of violation.
9. Submission of Incorrect Information
Providing incorrect information to the FTA during the registration process or through VAT returns can lead to fines.
- Penalty: AED3,000 for the first offence. If the offence is repeated within 24 months, the penalty increases to AED 5,000.
10. Voluntary Disclosures
If a business makes an error in its VAT return, it must file a voluntary disclosure.
- If the amount of the error is less than AED10,000, it can be corrected using the VAT Return for the period in which it was found.
- If the amount of the error exceeds AED10,000, then a voluntary disclosure should be made to the FTA within 20 working days of the error becoming notified.
If the FTA identifies the error before the business, it will impose a fine. - Penalty:
- Fixed Penalty of AED1,000 for first offence and AED2,000 for subsequent offences.
- If disclosed prior to FTA notification, the penalty will be 5% of the underpaid tax in Year 1, 10% of underpaid tax in Year 2, 20% of underpaid tax in Year 3, 30% of underpaid tax in Year 4 and 40% of the underpaid tax in Year 5 and after.
- If disclosed after FTA notification or during an FTA audit, the penalty will be 50% of the underpaid tax along with 4% of the underpaid tax per month from the due date of the VAT Return.
11. Late Penalty Payment
When a business fails to pay a penalty within 20 days of filing the voluntary disclosure or the receipt of a tax assessment, additional fines are imposed on the outstanding penalty amount.
- Penalty: 4% per month, up to a maximum of 300% of the original fine.
Conclusion
The UAE VAT laws emphasise strict compliance to ensure timely payments and accurate reporting. Non-compliance can lead to severe penalties that can be detrimental to a business’s financial health. It is essential for companies operating in the UAE to be diligent in their VAT obligations to avoid these penalties.
To avoid VAT penalties in the UAE, it is essential to:
- Establish proper systems that ensure VAT Returns are prepared and submitted in advance of deadlines.
- Implement automated reminder systems to keep track of VAT filing and payment deadlines.
- Allocate funds for VAT payments to ensure cash flow is sufficient when payments are due.
Sovereign Corporate Services has the expertise and resources to assist businesses to navigate complex VAT requirements in UAE and ensure compliance. Our team of qualified professionals can provide clients with guidance on VAT matters and help them to avoid any issues that may result in VAT penalties.
For further information, contact Ali Nawaz, Senior Manager – Client Accounting, by phone on +971 4 270 3400 or by email below.
