In this post I am going to talk about the value added tax (VAT) in the UAE. We are going to cover the follow issues:

1. TOP 3 errors when people return their VAT;
2. TOP 3 fines encountered in 2018;
3. Recommendations, which will help you reduce VAT penalties in 2019.

Let’s start with TOP 3 returns, the top 3 mistakes that people do while filing the VAT returns.

ERROR #1: REVERSE CHARGE MECHANISM.

When people disclose transactions in the VAT Return they tend to exclude transactions that are covered by reverse charging mechanisms on the grounds that the reverse charge mechanism transactions don’t have Tax effect as such. Since you are paying tax and you are recovering the same amount of tax in the same period itself, it is subject to certain conditions. This happens only when there is an importing of services. Since the importing of goods always goes through customs, and it is always declared,  it by default gets reflected in your VAT returns, so there is no chance that you can skip the reverse charge on the imported goods. Imported services are something that people tend to skip.

ERROR #2: ADJUSTMENTS TO VALUE OF GOODS AND IMPORTED.

VAT is charged on the CIF amount of the goods plus the clearance, the import/ customs duty. The amount that is fetched directly from the customs portal is different from the actual amount on which the tax is to be paid. This is where a lot of people forget to adjust the value of imported goods,

ERROR #3: THE USE OF ADJUSTMENT COLUMNS IN THE VAT RETURN.

The adjustment column is used only for bad debts (mostly), however, people use it to correct errors from previous VAT returns that have already been submitted, which is actually a misuse of this program. This could possibly lead to a lot of questioning of supporting documents during the phase of the audit and could lead to penalties.

TOP 3 2018 PENALTIES IN THE UAE

Since 2018 was the first year of VAT implementation, the highest amount of penalties that we came across were late registrations. This is the biggest penalty that a lot of customers face. Once you get registered late, you file your returns late, then you get penalized for the amount of VAT that was supposed to be paid back in time,  then you pay only after you get registered.

So, these are the two biggest penalties that we have come across during the year 2018. Hopefully, 2019 will see a few more additions to the penalties that the FTA would start levying, since the process of VAT audit has already started, getting the audited financial statements from the registrants is crucial.

THE FRAMEOF FINES IN VAT

The penalty could range from AED 1000 for the late filing of VAT returns to 20,000 for non-registration for VAT. The late payment penalty for the VAT is a slab based payment, it’s 2% of the amount due immediately after it is due. From the 7^th day from the due date up to 1 month from the deadline, the payment is 4 % and then 1 % is added every additional day, with a maximum cap placed at 300% of the amount due.

Recommendations what you need to be aware of before they file their VAT:

RECOMMENDATION #1:

If you have any doubts, consult someone before submitting your VAT returns or before starting transactions.

RECOMMENDATION #2:

Use online resources available on the FTA’s website for information and clarifications.

RECOMMENDATION #3:

Please, use the voluntary disclosure only when it is required. The voluntary disclosure is required when the tax effect of an error in the previous returns filed is greater than 10,000. In that case you can use the voluntary disclosure, otherwise, you have to use the normal VAT return and adjust the errors in the upcoming Vat returns. You do not have to use the adjustment column, but you do have to use the normal taxable value and VAT amount column that is standardly used throughout the VAT returns.

I hope that this information was helpful to you. If you have any questions, please contact me for more information and advice with VAT returns in the UAE.

Best regards,

PANKAJ KANJANI

Senior Tax Consultant of Garant Business Consultancy