Managing VAT compliance in UAE can feel like walking a tightrope; balancing complex regulations with the risk of falling into common traps or you may say VAT Pitfalls in the UAE that lead to costly mistakes. From misunderstood rules to overlooked deadlines, businesses face a variety of challenges that can quickly disrupt operations. In this blog, we’ll discuss UAE VAT Challenges and provide tips to keep your business on the right track while ensuring VAT Compliance.

Overview of VAT for Businesses in the UAE

Value Added Tax (VAT) was established in 2018 under Federal Decree Law No. 8 of 2017.

Value Added Tax (VAT) is an indirect consumption tax which is applied to goods and services throughout the entire supply chain, i.e. from production and distribution to the final consumer, different from sales tax, which is charged only at the point of sale. VAT compliance in UAE is recognized for its transparency. Since VAT is imposed at every stage, businesses can recover the tax incurred on their purchases, referred to as input VAT, against the tax gathered on their sales, called output VAT. As a result, the final consumer is required to pay VAT, which businesses gather on behalf of the government.

VAT Rate in UAE

The standard rate of VAT in the UAE is 5%, applied to most goods and services.

VAT Registration

Based on the income produced by companies, registration can be either compulsory or optional.

• Compulsory Registration: A business must register for VAT in the UAE if their total taxable sales and imports in the UAE exceed the mandatory registration threshold of AED 375,000 for the past 12 months or is expected to exceed it within the next 30 days.
• Voluntary Registration: A business has the option to register for VAT in the UAE voluntarily if its total taxable sales and imports in the UAE exceed the voluntary registration limit of AED 187,500 over the last 12 months or is expected to exceed within the next 30 days.

Common VAT Pitfalls UAE

Below are some common VAT pitfalls businesses face in the UAE particularly in their initial stages. Analyzing these will help new companies in saving time and funds by steering clear of these typical mistakes.

• Poor Planning

At first, companies did not completely understand the intricacies associated with the new tax. They found it challenging to submit VAT returns accurately because they either employed an incompetent staff or did not offer sufficient training to their workers.

• Lack of Comprehension

Many companies faced issues due to misunderstanding the VAT regulations and implementing the tax. Consequently, erroneous deductions occurred for non-compliant invoices, import payments, and restricted products.

• Delayed VAT Registration

Following the mandatory declaration of VAT registration, companies faced difficulties with the procedure due to its complex regulations. This element caused a delay in registrations, resulting in penalties imposed by the authorities.

• Erroneous Invoices

Several companies also faced difficulties in sending invoices. All invoices must include specific essential information. Certain small businesses encountered fines for failing to include all required information in their invoices.

• Late Filing

Businesses must file their taxes by a specific deadline. As it was a new regulation, numerous companies submitted their returns tardily and did not meet the deadline.

• Inaccurate VAT Computations

A common mistake that companies often make is miscalculation of VAT. This may occur when companies do not accurately compute the VAT on taxable supplies or mistakenly assert VAT on expenses that cannot be recovered.

• Wrong Application of VAT Rates

In the UAE, different rates of VAT are applied based on the type of goods and services. Although the basic VAT rate is 5%, certain supplies are either zero-rated or exempt. Using an incorrect VAT rate can result in mistakes in submissions and unwarranted fines.

• Failing to Consider VAT on Imports

If your company brings goods into the UAE, you must account for VAT on these imports using the reverse charge mechanism. Numerous companies do not adequately consider this, leading to underreporting and potential fines.

• Claiming VAT on Non-Business Expenses

VAT can solely be recovered on valid business costs. Numerous companies err by claiming VAT on personal or non-business expenses, potentially causing issues with the FTA.

• Lack of Clarity on VAT for Free Supplies or Discounts

When providing discounts or free samples, some companies wrongly believe they don’t have to consider VAT. In the UAE, VAT frequently remains applicable on promotional items or discounted sales, potentially resulting in underreporting.

Although these errors have been recognized from the experiences shared by business owners, there are also specific suggestions available. The businesses should adhere to subsequent practices in order to prevent common errors and strive for improved VAT compliance.

How to Overcome UAE VAT Challenges?

Here are several practices that assist in preventing compliance errors.

• Timely Registration: Ensure you register for VAT on time to prevent any fines or penalties. The business is required to register for VAT if its annual turnover exceeds AED 375,000.
• Record Keeping: To ensure compliance, a business must accurately document all transactions, such as sales, purchases, and general expenses, for easy presentation during tax filing.
• Accurate Generation of Invoices: Companies need to ensure that invoices generated are accurate. They must include all information and details specified as mandatory by the regulatory authorities, such as: total amount, VAT rate, as well as customer and supplier details.
• Timely Filing of Returns: Based on the revenue, businesses are required to file their VAT returns punctually. It can happen on a monthly or quarterly schedule.
• Understand VAT Refunds: Companies must recognize the procedure for obtaining VAT reimbursements. This will assist them to reduce their total tax costs.
• Stay Updated on VAT Regulations: Businesses need to remain informed about VAT regulations and stay knowledgeable about any modifications to them. This guarantees their adherence to all regulations, both old and new.
• Perform Regular Audits: Companies need to carry out frequent internal audits to identify any VAT-related problems within the organization that require attention. Carrying out these audits will highlight problems early and allow sufficient time to resolve them.