min read
May 17, 2024

VAT Penalties Businesses Should Know in the UAE

A detailed guide on UAE’s VAT penalties and tips to avoid them

The introduction of Value Added Tax (VAT) in the UAE was a step toward diversifying the economy and reducing the country’s dependence on oil revenues. Since the implementation of VAT in 2018, the UAE government has introduced various rules and clarifications to encourage compliance with the FTA guidelines. 

Qualifying businesses must complete their VAT registration, file VAT returns and pay the tax as per the UAE VAT LAW. Any non-compliance with the FTA rules can result in substantial fines, penal interest, or other legal actions

This blog covers the different aspects of VAT penalties in the UAE, including their applicability in different situations and how to avoid these fines. Keep reading to know more.

Overview of VAT in the UAE

VAT is an indirect consumption tax applicable to most goods and services in the UAE, with a few exceptions. The standard VAT rate is 5%; however, a few supplies also fall under the zero VAT or exempt category.

The Federal Tax Authority (FTA) is a government department responsible for monitoring VAT and other federal taxes in the UAE. It plays a crucial role in making sure that businesses comply with VAT rules. FTA is also responsible for imposing VAT penalties in case of non-compliance.

If your company provides taxable goods or services with an annual taxable turnover of more than AED 375,000, you must register for VAT within 30 days of crossing this threshold. You can also register voluntarily for VAT if your taxable supplies are less than AED 375,000 but above AED 187,500.

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What are VAT Penalties in the UAE?

Non-compliance with the UAE VAT rules can result in substantial fines and penalties. The concept of VAT penalties in the UAE is not to punish businesses but to encourage them to comply with the rules. It is a way for the FTA to ensure that all businesses contribute their fair share to the UAE’s economy.

The following sections explore different types of VAT fines and administrative penalties in the UAE, the conditions under which they are imposed, and how to avoid them.

Late VAT Registration Penalty

In the UAE, businesses must register for VAT within 30 days of crossing the mandatory registration limit. You can face a penalty if your company crosses this threshold and fails to submit a VAT registration application within the specified time.

Previously, the penalty for late VAT registration was AED 20,000. However, as per the Cabinet Decision No. (49) of 2021 issued on April 28, 2021, and the new penalty for late VAT registration is now AED 10,000.

Here are the other consequences that you may have to face in case of a delayed registration:

  • Disrupted Operations: It can lead to delays in obtaining a Tax Registration Number (TRN), which is essential for issuing tax invoices and claiming any input tax credit. This disruption can impact your ability to smoothly conduct business with other VAT-registered entities. 
  • Missing Out on Savings: Input tax credit allows you to reclaim VAT paid on your business purchases. By delaying registration, you might miss out on claiming these credits, potentially increasing your overall tax burden.

Late VAT Deregistration Penalty

You can deregister for VAT in the UAE when your company no longer meets the registration threshold.

Previously, the penalty for failing to apply for a mandatory de-registration within 20 working business days was AED 10,000. However, with the new amendment released on April 28, 2021, you need to pay a penalty of AED 1,000 for delayed deregistration. An additional monthly penalty of AED 1,000, capped at a maximum of AED 10,000.

Here are the other possible effects of this penalty on your business.

  • Continued Compliance Burden: Even after the deadline, you still need to fulfil your VAT compliance requirements until the deregistration is officially approved. This means filing your VAT returns as per the prescribed timeline or face further penalties for non-compliance. 
  • Administrative Requirements: You need to file VAT returns, maintain accurate records, and communicate with the FTA until the deregistration is finalised.

The final tax return should be submitted, and pending tax should be paid within 28 days from the effective date of deregistration.

Late VAT Return Filing Penalty

As per the UAE VAT Law, you must file the VAT Return within 28 days of the end of the Tax Period. If your company fails to submit a VAT return within the timeframe specified by the FTA, you can face a penalty of AED 1,000 for the first offence. If there is repeated non-compliance within 24 months, the penalty increases to AED 2,000. Otherwise, the FTA can take legal action if you are unable to file the return as per the rules.

Otherwise, the FTA can take legal action if you are unable to file the return as per the rules. Here are the other consequences you may have to face due to late filing of VAT return:

  • Delayed Refunds: A late return can significantly delay your ability to receive a VAT refund from the government, potentially impacting your cash flow.
  • Tax Assessment: Continuous late filings can lead to an FTA audit, which might be a time-consuming and stressful experience for your business.

Late VAT Payment Penalty

If your company is a taxable person and fails to settle the VAT amount mentioned in the tax return within the specified timeframe, you may face a late payment penalty. The calculation is as follows:

  • An instant fine of 2% of the unpaid tax is due right after the deadline.
  • An additional 4% is due on the seventh day following the deadline.
  • A 1% daily penalty is applicable on any amount not paid within one month after the deadline. This is capped at a maximum of 300% of the original tax amount.

Beyond the financial burden, late VAT payments can lead to legal consequences, including potential legal action by the FTA.

VAT penalties UAE businesses should know

Penalty for Submission of Incorrect Tax Return

Submitting an incorrect tax return is a serious violation of the VAT regulations in the UAE. The penalty for a first-time violation is AED 3,000. If non-compliance is repeated within 24 months, the penalty increases to AED 5,000. 

Beyond the initial penalty, there are supplementary aspects to consider:

  • Tax Shortfall: An under-declared tax amount means you owe the difference and potential interest charges.
  • FTA Audit: Inconsistent information or repeated errors might flag your business for a potential tax audit, which can be a time-consuming process.

Penalty for Failure to Maintain Proper Books of Accounts

Maintaining proper books of accounts is not just good business practice but also a legal requirement in the UAE. These records typically include invoices, receipts, bank statements, and other documents that support your VAT calculations. You can face a penalty if you fail to keep the required documents and other information specified in the UAE tax law. 

For the first offence, the penalty is AED 10,000. If there is repeated non-compliance within 24 months, the penalty increases to AED 50,000.

Beyond potential fines, there are additional drawbacks to neglecting your bookkeeping:

  • Cash flow issues: Poor recordkeeping can make it challenging to track your finances effectively, potentially leading to cash flow problems.
  • Delayed Refunds: Without proper documentation, your ability to claim input tax credits and receive VAT refunds might be affected.

Tips to Avoid VAT Penalties

Here are some useful strategies that can help you avoid hefty fines and penalties in the UAE:

  • Ensure you register for VAT according to the specified timeline. File your VAT returns and settle any tax payments before the deadlines set by the FTA. Remember, late registration, filing, and payments all incur penalties.
  • Follow accurate bookkeeping practices. Keep all receipts, invoices, and other documents readily available. This ensures accurate VAT calculations and avoids penalties for errors in your return.
  • Leverage a reliable expense management platform like Alaan. This can streamline recordkeeping and minimise the risk of human error when recording VAT amounts.
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Complying with VAT regulations in the UAE is crucial for your business's financial health and smooth operation. The penalties for VAT non-compliance can be substantial and have significant implications for your business. Alaan can simplify your VAT accounting procedures to ensure accuracy and encourage compliance with the FTA rules.  

Alaan’s platform is optimised for accountants, helping you stay one step ahead with your VAT and Corporate Tax planning. It offers a centralised hub for managing your entire business spend, providing full control and visibility over each transaction.

With Alaan, you can avoid common pitfalls such as late registration, late return filing, and late payment. Automating VAT reporting allows you to focus on running your operations efficiently.

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Ready to take the next step towards effective VAT management? 

Contact Alaan today and let us help you stay ahead of VAT penalties in the UAE.

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