There are several rules and regulations businesses have to follow with respect to VAT or Value Added Tax in UAE. As such, it can be very easy for registered entities to make VAT errors. Take note: even the smallest or simplest errors can result in significant penalties. Business owners running VAT-registered businesses in UAE are advised to seek specialist advice on VAT in order to make sure not to fall into any trap.
In the United Arab Emirates, the tax authorities have specific powers that allow them in making visits and inquiries related to VAT. If a business is the subject of an inquiry, it can typically involve tax inspectors reviewing accounts, which is a costly, complex, and time-consuming process. When a tax inspector in UAE makes an inquiry of a business and considers it to be in violation of certain legislation, business operations are likely to be affected as a consequence. This is why it is best to make voluntary VAT disclosures in UAE should you find out an error has occurred in the process of complying with VAT regulations. Although there are lesser penalties compared to when the tax authorities in UAE uncover a violation themselves, fines for a voluntary UAE VAT disclosure are as follows:
A fixed penalty for a voluntary VAT disclosure (VAT Penalty UAE)
- First offense – AED 3,000
- Repeated offense – AED 5,000
Percentage-based penalty for UAE VAT voluntary disclosure
- Voluntary disclosure prior to the tax authority notifying the business of an error – five (5) percent of the amount that wasn’t disclosed
- UAE VAT voluntary disclosure following notification from tax authority regarding a scheduled audit but prior to the start of a tax audit – thirty (30) percent of the tax amount unpaid by the business to the tax authority
- A voluntary disclosure while a tax audit is ongoing – fifty (50) percent of the tax amount unpaid by the business
VAT-registered businesses in the country are urged in ensuring they file accurate tax returns as a voluntary VAT disclosure comes with both a fixed penalty (VAT Penalty UAE) and a percentage-based penalty.
What are the common violations of VAT-registered businesses?
A list of errors that are often committed by taxable entities in the UAE are as follows:
- The incorrect VAT rate was applied – a taxpayer has to make sure that it is charging the correct VAT rate on every supply. Because VAT is a type of transactional tax, a business has to consider a correct rate for every transaction. Because a business normally makes a repeated supply of an identical set of goods and/or services, it’s absolutely crucial for the appropriate tax rates to be applied to transactions.
- Failure in accounting for VAT on a reverse charge basis – a taxable entity acquiring taxable products or services in UAE from abroad within the GCC generally must make sure that VAT has been accounted for a reverse charge basis. The obligation of a tax entity is particularly important where it receives a supply and it has no entitlement for VAT recovery as an absolute cost for VAT then arises.
- Incorrect recovery of VAT on a non-deductible expense – while there’s a couple of important exceptions, the tax paid of a business is not recoverable for particular expenses that are incurred such as on accommodation, drinks, food, entertainment, and other related costs to entertain clients or prospective businesses.
- Failure in making adjustments for unpaid purchases – regulations introduced in UAE provides that when a taxable entity deducts VAT when filing VAT returns but hasn’t paid a supplier for a supply within six months from the end of a VAT accounting period, the VAT amount originally claimed to be a deduction has to be adjusted. Adjustment equals the proportion of VAT related to an unpaid supplier invoice. Readjustments can be reclaimed for VAT incurred as soon as a supplier is paid.
When should my business report errors to correct them?
Errors are best reported as soon as the business finds them. Also, errors are to be added to the VAT records of the business. You may find that it helps to keep separate records in the current VAT account which you can update when errors are discovered. It is best to do the following:
- show the date on which an error was discovered
- identity the period an error occurred
- attach any related documents e.g. invoices
- identify whether an error was input or output tax-related
Read also: How To Reduce VAT Penalties In UAE
Regardless of the extent and nature of an error or violation committed by your business unintentionally, it is absolutely essential to correct it. VAT voluntary disclosure in UAE presents a lot of benefits as interest and penalties are mitigated. That being said, there’s also a great advantage for businesses to regularly review their VAT-related affairs. To know more about VAT voluntary disclosure in UAE, call us here in VAT Registration UAE today!