The introduction of Value Added Tax (VAT) in the United Arab Emirates marked a significant milestone towards efforts aimed at diversifying the economy and reducing the country’s reliance on oil revenues. The implementation of VAT by the government in 2018 was accompanied by an elaborate set of rules and regulations to ensure uniform adherence to VAT guidelines across all businesses in the country.
VAT is an indirect consumption tax applicable to the majority of goods and services in the UAE, with a few exceptions. The standard VAT rate is five percent. Any firm that provides taxable goods or services with an annual taxable turnover of more than AED 375,000 is legally required to register for VAT payment within a time period of thirty days of crossing the stipulated revenue threshold. Firms may also register voluntarily for VAT if their taxable supplies fall short of the required amount of AED 375,000, but are above the amount of AED 187,500.
To begin with, businesses that are eligible for VAT are required to undergo formal registration, file VAT returns and pay proper tax returns. Any non-compliance with the FTA rules can result in substantial fines, penal interest, or other legal actions.
Read Also: VAT Late Payment Penalty In UAE
Penalty for Delayed VAT Registration
Businesses who neglect to register for VAT within the stipulated time period of thirty days are required to pay a fine of AED 10,000 in accordance with the Cabinet Decision No.9 of 2021. In addition, late registration may amount to a range of undesirable consequences for firms, such as:
- Disrupted Operations: Firms may suffer delays in receiving a Tax Registration Number (TRN), which is essential for issuing tax invoices and acquiring input tax credit.
- Missing Out on Savings: As aforementioned, input tax credit lets firms apply for the reimbursement of VAT paid for organizational costs. As such, failure to register for VAT in a timely manner may gradually increase the tax burden of firms.
Penalty for Delayed VAT De-Registration
Businesses who neglect to apply for a VAT de-registration within the stipulated period of twenty working business days are required to pay a fine of AED 1,000 by the NEW Amendment in Tax Laws of 2021. In addition to this, firms may suffer from other repercussions.
- Continued Compliance Burden: After missing the stipulated deadline, firms must continue to fulfill their VAT requirements until the deregistration has been formally approved. This expends additional organizational resources which could have been used elsewhere if deregistration had been completed in a timely manner.
Penalty for Late VAT Returns
Businesses are legally required to file the VAT Return within a stipulated time period of twenty-eight days of the end of the Tax Period. Businesses that fail to adhere to the timeframe are subject to penalty.
- Firms must pay the amount of AED 1,000 for the first offence i.e. the first instance of failing to file tax returns on time.
- Repeated non-compliance with the tax return timeframe within a twenty-four-month period results in the penalty being increased to an amount of AED 2,000.
- The FTA reserves the right to engage in legal action against any firm that has built a record of neglecting the regulations of VAT tax returns.
Other consequences may include:
- Delayed Refunds: Late returns hinder firms’ abilities to receive a cash refund from the government and thus interferes with their cash flow.
Tax Assessment: Firms may be subjected to an FTA audit for continuous non-compliance to VAT rules which disrupts the firm environment and places undue pressure on organizational leaders.
Read More: 11 Tips to Avoid VAT Late Payment Penalties in the UAE
Penalty for Incorrect Tax Return
Firms that submit incorrect tax returns are in serious breach of VAT regulations in the UAE, and will be fined accordingly.
- Firms must pay the amount of AED 3,000 for the first offence.
- Repeated non-compliance with the tax return timeframe within a twenty-four-month period results in the penalty being increased to AED 5,000.
Other consequences may include:
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- Tax Shortfall: An under-declared tax amount means that firms owe the difference to the government.
- FTA Audit: Big errors such as incorrectly filed tax returns have the potential to flag firms for a potential tax audit, which is a laborious and time-intensive process.
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VAT Penalties for Taxable Persons
Firms that fall under the category of taxable persons who fail to settle the VAT amount mentioned in the tax return within the specified timeframe are also subject to penalty. The penalty is adjusted according to the following criteria:
- An instant fine of 2% of the unpaid tax to be paid immediately after the deadline
- An additional 4% to be paid 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.
Other Penalties for Taxable Persons
- Failure to issue tax credit notes and/or alternative statements may incur a penalty of AED 5,000 for each missing document.
- Failure to display prices to customers inclusive of tax may incur a penalty of AED 15,000.
- Failure to comply with the rules and regulations of trading goods in designated zones may be either higher than AED 50,000, or 50% of the tax that has gone unpaid on such goods as a result of this violation.
- Failure to comply with the rules and regulations concerning the issuance of electronic tax invoices may incur a penalty of AED 5,000 for each incorrect document.
Penalties for Improper Bookkeeping
VAT records typically include invoices, receipts, bank statements, and other documents that support your VAT calculations. Firms that fail to keep proper records may incur a penalty of AED 10,000 for the first offence, and AED 50,000 for repeated non-compliance in twenty-four months.
Check Out: UAE VAT Invoice Requirements
Contact expert services of VAT Registration UAE
To avert penalties and fines for noncompliance with VAT regulations, businesses are advised to avail the expert services of trusted Tax Consultants in the UAE. VAT registration UAE, a reputable Tax Consultant, assists Taxable Persons to timely register and file VAT in compliance with statutory VAT regulations in UAE. Thus, contact us today and we shall be glad to assist you.
Frequently Asked Questions
Q.1 What are VAT penalties for firms in the UAE?
VAT penalties are applicable in cases of late registration for VAT, late deregistration, improper filing of tax returns, filing tax returns incorrectly, and several other oversights.
Q.2 What happens if a business repeatedly misses VAT deadlines in the UAE?
If deadlines are missed regularly, firms may face increased administrative scrutiny, penalties, inability to get refunds from the government, and even tax audits.
Q.4 How can businesses avoid late VAT payment penalties in UAE?
To avoid VAT penalties in the UAE, businesses must comply with the FTA’s VAT regulations.
- Timely Filing of VAT Returns: Filing VAT returns on time is essential to avoid penalties. Businesses should establish proper systems that ensure returns are prepared and submitted well before the deadline.
- Setting Up Reminders: Implementing reminder systems can help businesses keep track of VAT filing and payment deadlines. Automated reminders can be set up within accounting software, or through external calendar applications.
- Allocating Funds for VAT: Businesses may set aside money specifically for VAT payments to ensure they have sufficient cash flow when the payment is due.
- Professional Consultation: Engaging tax consultants or accountants with expertise in UAE VAT law can help businesses navigate complex VAT requirements and ensure compliance. These professionals can provide valuable guidance on VAT matters and help firms avoid issues that are leading up to chances of penalty.
Q.5 Can businesses appeal against VAT late payment penalties in UAE?
Yes. In the UAE, firms may apply for a Penalty Waiver to the FTA if they feel the penalty has been wrongly filed. However, this is not applicable for instances of tax evasion. Firms can also apply for penalty installments if the amount to be paid exceeds AED 50,000.
Q.6 What are the consequences of not paying VAT penalties in the UAE?
Firms that fail to pay penalties on time may be subjected to internal review, and restriction of resources and charged with increased penalty amounts in the aftermath.
