How to avoid VAT penalties in UAE?

As you are on this page, we assume that you either live in the United Arab Emirates or are curious about the subject. In either case, you are in the right place. We cannot avoid paying taxes in our daily lives. We all pay taxes every day in one way or another. So, it’s important to keep up with the latest developments.  In UAE, most of the goods and services are subject to Value Added Tax. After each tax period, every taxable person in the UAE is supposed to file a VAT return with the Federal Tax Authority (FTA). 

• The new federal corporate tax on business earnings of 9% on profit would take effect only on June 1, 2023. 

What is VAT?  

VAT stands for Value Added Tax. At each stage of an item’s manufacturing, distribution, and sale, it is levied on the gross margin.   

Read: How VAT work in UAE? An overview. https://www.simpleaccounts.io/2020/09/08/vat-in-uae/ 

Read: How to file your taxes easily? https://www.simpleaccounts.io/2022/03/03/file-taxes-easily/  

How to Avoid VAT Penalties in UAE?

Record your transactions 

Keep records of every business transaction including income, cost, expenses, and more. Having proper records of transactions helps while filing VAT and other taxes. The government may ask for the records and the failure to submit them on said time attracts a penalty. Recording the transactions also helps in being organized.  

Learn about taxes 

Know everything about VAT and other taxes, if any. You are supposed to pay the tax to the government which you collect from your customers. The government also reimburses the tax you paid to your suppliers at the same time. Everyone should be aware of the taxes in the nation, regardless of their line of employment. Being updated about all these assists you in making the right decisions without being fined.  

Register for VAT 

Register your business for VAT if your annual turnover is more than AED 375,000. If your annual turnover is more than AED 187,500, it is optional. The criteria for VAT registration vary according to the turnover of the businesses. As you are running a business, you must be knowing the criteria. So that any future complications can be avoided. 

Keep note of the tax periods 

A tax Period is a specific period for which the payable tax shall be calculated and paid. While the tax period is monthly for a few, it is quarterly for others. File VAT returns monthly for businesses with an annual turnover of AED150 million or more and quarterly for businesses with an annual turnover below AED150 million. 

Send Tax Invoices without fail  

A taxpayer must send out a tax invoice within 14 of the date of supply [Article 67 of the UAE VAT Law]. Never miss mentioning the name, date, company details, and other information on the receipt. 

Learn how reverse charges work 

Businesses who buy items from vendors based outside of the UAE are typically subject to the Reverse Charge Mechanism, a special tax treatment of the UAE VAT.  When products and services are imported from outside the GCC, these fees are applied. So the business houses must be knowing about the mechanism to record in the transactions.  

Update about Zero-rated and VAT-exempted supplies 

There are other categories such as zero-rated supplies and VAT-exempted supplies, learn about both and make sure that you file taxes accordingly. Zero-rated supplies in UAE VAT refers to the taxable supply on which VAT is charged at zero- rate. 

Tax Penalties 

20 days are given to pay the underpaid taxes without penalties. 

Following the 20-day grace period, a 2% penalty will be assessed, followed by a 4% monthly penalty that must be paid at regular intervals beginning one month after the due date. The cap on the penalties remains at 300%.  Therefore a business must maintain proper records, failure in submitting the records when asked may attract a penalty of AED 10,000 for the first time and 20,000 on repetition.  

Even the smallest mistake in records can attract heavy penalties. The above mentioned are a few among them. 

It is the responsibility of the business houses to keep track of the records and developments regarding the taxes. There are fixed fines and penalties for every mistake that happens while filing taxes. If you are looking for ways to avoid such penalties, the only way to do so is to be vigilant about taxes.