Value Added Tax (VAT) is a consumption tax that has been implemented by many countries around the world, including the United Arab Emirates (UAE). Since its introduction in the UAE on 1st January 2018, VAT has become an integral part of the business landscape. It was introduced to compensate for the decline of oil industry revenues, which were reinvested in infrastructure development. It’s essential for businesses to understand and comply with the regulations to avoid potential penalties and ensure smooth operations. One such requirement that should be fulfilled by businesses registered under the VAT law is to file tax returns with the Federal Tax Authority.
In this blog, we’ll discuss some common mistakes businesses make when filing VAT returns in the UAE and how to avoid them.
Incorrect VAT Rate & Calculation
Calculating VAT accurately is crucial to avoid underpaying or overpaying. Many businesses make errors in identifying the relevant VAT rates and, thus, commit errors while computing VAT on invoices or recording transactions, which can lead to compliance issues.
BCL Tip: Use accounting software or hire a qualified accountant to ensure accurate VAT calculations. Review the VAT regulations and guidelines to correctly determine the applicable VAT rate for your goods or services. Familiarize yourself with the standard VAT rate of 5% in the UAE and any zero-rated or exempt supplies applicable to your business.
Neglecting Proper Record-keeping
Maintaining accurate records of all financial transactions such as records of Sales, purchases, imports and exports, credit notes, output, and input tax is essential for VAT compliance. Such records should be maintained by taxable persons and retained for a period of 5 years after the end of the tax period to which they relate. Some businesses neglect this aspect, leading to difficulties during VAT return filing.
BCL Tip: Implement robust record-keeping processes. Store invoices, receipts, and other financial documents in an organized manner. Digital tools and cloud-based accounting software can help streamline this process.
Late VAT Return Filing and Payment
Once you have registered for VAT in the UAE, you are required to file your VAT return and make related VAT payments within 28 days from the end of your tax period. Late filing or payment of VAT returns can result in penalties and interest charges as below:
- For the first offense, a penalty of AED 1,000 will be imposed.
- In case of a repeated offense occurring within the twenty-four months following the first offense, a higher penalty of AED 2,000 will be imposed.
Some businesses underestimate the importance of timely compliance.
BCL Tip: Set up reminders and a structured system to ensure that VAT returns are filed and payments are made on time. The UAE tax authorities provide clear deadlines for VAT return filing, so mark these dates in your calendar.
Omitting to record Zero-rated and exempt sales in the VAT return
The registered entities may correctly file output and input VAT, but they may fail to record zero-rated and exempt sales.
BCL Tip: The businesses must identify the zero-rated or exempt sale, and it should be properly documented and reported to the competent authority.
Omitting to pay VAT under RCM
On certain notified supplies, the recipient or the buyer of goods or services would be responsible for paying the VAT to the FTA. This concept is known as the reverse charge mechanism. The businesses may not take into out such transactions and may file a faulty return.
BCL Tip: Businesses must compute the amount of tax to be paid on notified transactions subject to RCM, account for such amount of tax as output tax during the purchase, and then declare it in their VAT return. In some cases, businesses may be entitled to an input credit, if permissible under the law. Ensure that you have the required documents i.e. invoices for future reference.
Claiming Input Tax recovery on Inputs not permissible under the law
The tax paid on the purchase of the inputs used to make the exempted supplies is not recoverable by the entity. In addition to this, the registered businesses cannot claim input tax recovery on entertainment services provided to non-employees, motor vehicles purchased for own use, and goods & services purchased for use by employees for their personal benefit. Often businesses do not consider these points under the law while recovering the input tax.
BCL Tip: The registered entities should make note of such supplies on which they will not be eligible to recover the input tax paid. The input tax is recovered only on supplies that are eligible for input VAT recovery.
In conclusion, filing VAT returns in the UAE requires careful attention to detail and compliance with regulations. Avoiding these common mistakes can save your business from penalties, audits, and unnecessary stress. Stay informed, invest in proper record-keeping, and seek professional assistance when needed to ensure smooth and error-free VAT compliance in the UAE. Remember that staying proactive and up-to-date with the latest tax developments is key to successfully navigating the world of VAT in the UAE.