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Businesses operating in the UAE have been challenged in matters related to the indirect tax compliance since 2018; the year VAT was introduced in the UAE and Saudi Arabia. Many unfortunate companies have found themselves in deep trouble after unconsciously making mistakes and misunderstanding the VAT implications on their businesses.
Government authorities mandate companies in the country to comply with tax regulations fully. The Federal Tax Authority, FTA, imposes hefty amounts of penalties on account of non-compliance on the companies’ part.
Common VAT Mistakes in the UAE
Here, let’s take a look at some of the horrible mistakes you are making with VAT and the amount of penalty that may arise as a result of it.
Failure to display prices of products and services exclusive of Value Added Tax
Companies who have registered themselves for VAT are required, by law, to display the prices of taxable goods and services inclusive of VAT. However, the display of VAT can be excluded in the following cases:
- The customer is also a tax registered business
- Supply has to be exported
- Goods are being imported
Failure to display the price along with the VAT can result in an administrative penalty of AED 5,000, which has to be settled with immediate effect.
Failure to comply with procedure and conditions concerning the VAT treatment of designated zones
A designated zone, or a VAT-free zone, is an area specified by the Cabinet of UAE to be considered outside the jurisdiction of UAE for the purpose of VAT. As a result, VAT will not apply to the storage or transfer of goods from a specific designated zone to another. If you want to know more about the treatment of VAT in the free zone and its related conditions concerning storage and transfer of goods between different designated zones, it is advised to seek the counsel of a tax agent in UAE.
Non-compliance with the procedures and conditions prescribed for designated zones can lead to a penalty the higher of AED 50,000 or 50% of the tax.
Failure to issue tax invoices or any other document that signifies the occurrence of sales to customers
A tax invoice is an essential document for any business. When you enter into a transaction with a customer or make a supply of taxable goods or services, you are required to issue a tax invoice. When companies fail to issue tax invoices, they invite an administrative penalty of AED 2,500 to be imposed on them. This penalty applies to every tax invoice that the business has failed to issue.
Failure to issue tax credit notes or similar documents to customers
Tax credit notes are documents that signify the reduction or cancellation of a taxable supply that is impacting the invoice raised earlier. It is required to raise a tax credit note in order to cancel out the VAT that was charged earlier.
An administrative penalty of AED 2,500 is imposed on a VAT registered company that fails to issue a tax credit note.
In addition to the mandatory issuance of a tax invoice and a credit note, it is vital to ensure that essential details, prescribed by UAE VAT law, are contained in the issued documents.
Failure to notify the tax authorities with regards to tax charges based on profit margins
Under the profit margin scheme, a taxable person or a business has to calculate VAT on taxable supplies using the profit margin earned instead of the original selling price. The profit margin can be calculated by deducting from selling price the purchase price of the good that was previously taxed to an end-user.
The profit margin scheme is applicable on a particular type of supplies as can be seen below:
- Second-hand goods as VAT has already been levied on the first supply
- Antique items that are as old as 50 years or more
- Collector’s items that include stamps or coins
A registered business can invite an imposition of an administrative penalty of AED 2,500 if they fail to notify FTA, regardless of intentional or unintentional, of the tax charges calculated based on margins.
Failure to comply with procedure and conditions concerning the issuance of e-tax invoices and e-tax credit notes
The law has established uniform regulations and has granted legal recognition on the use of the electronic medium for business transactions. A registered business shall issue tax invoices and credit notes electronically if they meet the following criteria:
- The VAT registered company is capable of securing and retaining copies of issued documents as per FTA’s record-keeping requirements.
- The integrity and authenticity of the documents can be guaranteed
If a VAT registered organization in UAE fails to comply with the issuance of e-tax invoices and credit notes, then a penalty of AED 2,500 will be levied on them.
By 2021, the UAE’s government and the FTA plan to completely go paperless as they aim to digitize both internal and customer transactions by 100%.
Failure to file tax returns within the specified time frame
Taxable persons and businesses must comply with VAT laws and file tax returns within the tax period as specified by tax authorities. However, if a company fails to submit tax returns on the specified time frame, then they will be entitled to pay AED 1,000 for the first offense. On account of the repetition of the offense within 24 months, a penalty of AED 2,000 will be imposed.
Failure to pay tax due returns within the specified time frame
This is a hefty fine that could include daily penalties as a percentage of the unpaid tax. There are various penalties imposed on the non-payment of VAT that varies from a fixed amount to a rate and could reach up to 300% of the due unpaid tax.
Seek an Expert’s Advice
The VAT law was introduced in early 2018 and it has been more than 3 years since its implementation. However, it’s still no surprise that businesses have been making unconscious mistakes concerning VAT implications.
According to tax experts, poor planning and hiring the wrong resources can further make tax matters critical for your business and may even attract substantial fines.
Since taxes are complicated and an inescapable element of any business, it is always recommended to seek advice from an expert who is licensed and professionally responsible whenever you encounter tax-related issues. Tax is not a burden nor a misery if it is done the right way. Looking at the brighter side, with an expert’s tax advice, your company can gain valuable insight into the business’s reporting and mechanism.