UAE Value Added Tax (VAT) has come into existence from January 1, 2018, and business enterprises are required to adhere to the Federal Tax Authority (FTA) regulations regarding timely VAT filing and registration. Most of the companies do make unavoidable errors at the time of registration, however, which are subject to penalty, delay, and non-compliance.
Incorrect VAT registration can result in monetary fines, business disruption, and increased FTA scrutiny. As a new business, SME, Free Zone business, or foreign business, knowledge and prevention of the following mistakes are the keys to smooth VAT compliance.
In this article here, we present the most common VAT registration mistakes in the UAE and how you can prevent them.
- Incomplete VAT Registration
The Error:
- Most companies do not register under VAT within the time limit, assuming that they are below the mandatory threshold or keeping fingers crossed.
- Companies with taxable turnover over AED 375,000 need to register immediately without delay and to evade the penalty.
The Fines:
- AED 10,000 as a penalty for late VAT registration.
- Other fines for default of payment and incorrect tax returns.
Avoid It:
- Keep track of your revenues each month to know when you reach the VAT threshold.
- Pre-register VAT on the FTA e-Services portal in advance.
- Seek the advice of a corporate tax consultant to spare yourself trouble.
- Erroneous VAT Registration Information
The Mistake:
Companies get errors while registering for VAT, i.e., registration details as follows:
- Trade license number or activity incorrect.
- Legal entity type incorrect (e.g., sole proprietorship, LLC, Free Zone entity).
- Bank details incorrect.
The Consequences:
- VAT approval delays for non-verification of FTA.
- Nonsensical or early VAT registration.
How to Avoid It:
- Thoroughly verify company data before filing VAT application.
- Verify company data against trade license data.
- Prepare supporting documents in advance (trade license, financial statements, bank statements).
- Unnecessary or Early VAT Registration
The Mistake:
- Unplanned company registration for VAT by companies without their verification for taxability or ascertaining their tax burden.
- Turnover below AED 187,500 is VAT-free.
- VAT-registered businesses must prepare periodic returns regardless of taxable sales.
The Implications:
- Inefficient VAT administration burden, i.e., filing of VAT returns.
- Risk of FTA penalty for default or mistake in filing returns.
- Additional administrative and financial burden.
Evasion:
- Ensure that you qualify before applying for VAT registration.
- Wait till the voluntary ceiling if you don’t exceed AED 187,500.
- Consult a VAT expert with the intent of identifying the best approach.
- Incorrect VAT Registration Type
The Mistake:
- Companies choose an erroneous VAT registration type (i.e., VAT group registration or singular registration).
- There are several companies that have subsidiaries which are not VAT Group Registered and hence there are several tax returns for each company.
The Penalties
- Increased expense of tax compliance and filing several VAT returns.
- Lost VAT reporting consolidation through Group VAT Registration.
- Mismatched input tax deduction in case of transactions with associated persons.
Avoidance:
- Where you have several businesses that fall under common ownership, you are eligible for registration for VAT Group Registration.
- Take advice from a corporate tax expert in following a suitable VAT registration scheme.
- Poor Maintenance of VAT Records
The Mistake:
- Business enterprises fail to keep accurate VAT records of:
Tax Registration Number (TRN) sales invoices.
Output and input amounts of VAT.
Expenses receipts for VAT refund claim.
The Penalties:
- FTA audit and fines for failure to keep accurate records.
- VAT refund claim rejection due to unavailability of invoices.
- High possibility of controversy or non-adherence to taxation.
How to Avoid It
- Maintain VAT records on bookkeeping computer software or with the assistance of a VAT advisor.
- Retain all VAT invoices, receipts, and account books for five years and more.
- Ensure VAT invoices contain FTA invoice format requirements.
- VAT Return Submission Errors
The Error:
- Companies submit VAT returns incorrectly as follows:
- Inaccurate calculation of VAT (undersizing/input VAT/sizing output VAT).
- Filing zero VAT returns without a valid reason.
- Delayed VAT return filing.
The Penalties
- FTA VAT error penalties (AED 1,000 for initial and AED 2,000 for repeat transgression).
- VAT audit or penalty threat in case of VAT under-declaration.
- Suspended VAT refunds due to input VAT wrongly claimed.
How to Avoid:
- Check VAT return calculations prior to submission.
- File VAT returns early (28th of each tax period month).
- Not aware of VAT on Imports and Exports
- Import VAT Reversal Charge Mechanism has not registered these enterprises.
- Other companies are not handling VAT on importation of goods in a proper way.
- Exporting businesses apply incorrect VAT rates when exporting overseas.
The Consequences:
- FTAs for non-compliance with the VAT rules on import/export.
- Errors in VAT reporting can lead to extra tax payment.
- Refusal of VAT relief to qualifying export businesses.
How to Prevent It:
- Registration under Import VAT Reversal Charge to prevent cash flow issues.
- Application of proper VAT treatment to cross-border transactions.
- Professional VAT consultancy to facilitate proper import/export VAT processing.
Conclusion
UAE VAT registration will become necessary for firms with a turnover of over AED 375,000, and rigorous compliance will avoid penalty and tax audit. The majority of businesses make unnecessary errors such as late registration, inaccurate information, inadequate documents, and return errors of the VAT returns.
By adopting best practices, organisations are able to streamline VAT registration and compliance on schedule. VAT consulting services help companies to automate FTA regulatory compliance, eliminate errors, and improve VAT reportage.
