VAT in the UAE: how to avoid costly mistakes
Irina Ryzhakova
Sep 14, 2023
We analyse typical mistakes made by companies and show how to protect your business from FTA fines
VAT in the UAE seems straightforward — just 5%. In practice, however, companies regularly incur fines of tens of thousands of dirhams. The problem is not in the arithmetic, but in the details: where the service is provided, how to issue an invoice, and what to do with transactions in free zones.
In the first years following the introduction of VAT in 2018, businesses were given time to adapt. That period has ended: the FTA has moved to the phase of active enforcement, conducting more audits and applying a wide range of fines.
The active stance of the FTA in conducting tax audits and enforcing penalties indicates that the initial period for businesses to adapt to the VAT system has ended. The regulator shows its intention to strictly enforce compliance with tax legislation.
Main Causes of VAT Errors in Companies
Since 2018, VAT has become a part of the UAE's tax system. Numerous errors identified during audits, especially concerning the classification of supplies, determination of the place of supply, and application of special regimes, confirm the existence of hidden complexities.
The main causes of problems are:
Underestimating the complexity of the system. 5% is just the basic rate. There is a zero rate, exemptions, and special regimes.
Constant changes in the rules. The FTA regularly issues new explanations and clarifications.
International specifics. The UAE is a trade hub, with most transactions related to export-import.
The human factor. Even experienced accountants can make mistakes in classification or calculations.
As a result, companies lose money not only from fines but also from correcting the consequences. For instance, untimely registration triggers a chain reaction of negative financial consequences — from fines to penalties for late declarations for previous periods.
Errors in VAT Registration and Fines for Them
When registration is required
Mandatory registration occurs when annual turnover exceeds 375,000 dirhams. Voluntary registration applies at a turnover of 187,500 dirhams.
Common Mistakes
Incorrect calculation of turnover. Not everyone knows that only taxable supplies and imports need to be considered. Exempt operations are not included in the calculation.
Another issue is untimely registration. Applications must be submitted within 30 days of exceeding the threshold or when you anticipate exceeding it in the next 30 days.
Cost of a Mistake
The FTA fines for late registration range from 10,000 to 20,000 dirhams.
Different sources indicate different amounts — some mention 20,000 AED for failing to file an application on time, while others cite 10,000 AED for lack of registration when required. Therefore, it is important to consult the latest clarifications from the FTA.
But this is just the beginning of the problems:
You need to pay VAT for the entire period of delay.
Each individual unfiled declaration incurs a separate fine.
Penalties apply to unpaid taxes: 2% immediately after the deadline, +4% after a week, and +1% daily or monthly (according to various sources) after a month, up to a maximum of 300% of the amount.
Thus, the initial fine for late registration is just the tip of the iceberg of financial losses.
How to Avoid Problems
For growing companies: implement a turnover monitoring system. Track not only historical data but also forecasts for the coming months. For seasonal businesses, it is important to consider that one large contract or sales surge can unexpectedly push the turnover over the thresholds.
Accounting and Documentation Requirements, Fines for Violations
What the law requires
The FTA requires maintaining comprehensive accounting in accordance with UAE standards:
Accounting for income and expenses
Cash flow
Balance sheets and profit and loss statements
Registers of fixed assets and inventory
Payroll documents
All primary documents must be retained for a minimum of 5 years. For real estate transactions, this period extends to 15 years.
Common Mistakes
Incomplete documentation. Missing contracts, invoices, bank statements. During an audit, this automatically raises suspicions.
Documents only in English. Upon FTA request, translations into Arabic must be provided. Failure to do so incurs a fine of 20,000 dirhams.
Data discrepancies. Information in accounting does not match trade licenses or bank transactions.
Cost of a Mistake
Improper document storage: 10,000 dirhams for the first offence, 50,000 for repeat offences.
Failure to provide documents in Arabic: 20,000 dirhams.
These documents are also needed for corporate tax. Errors in the "primary documents" can create problems for two taxes simultaneously and increase the risk of fines.
Tax errors are among the most frequent and costly
The author of the article — Irina Ryzhakova, a tax agent registered in the UAE, will help assess risks, set up accounting, and avoid fines.
Errors in Applying VAT Rates: 0%, 5% and Exemption
Three Types of Rates
5% — the standard rate. Applies to most goods and services.
0% — zero rate. Exports, international transport, oil and gas, new residential properties, some medical and educational services.
Exemption from VAT. Financial services, resale of housing, undeveloped land, public transport.
Key Distinction
With the zero rate, you can reclaim input VAT. With exemption — you cannot. This difference is critical for profitability.
Common Mistakes
The problem: many think that any export is automatically subject to the zero rate.
Reality: All FTA conditions must be strictly followed, and a complete set of documents must be available:
Customs declarations
Transport documents
Proof of payment from the foreign buyer
If the documents are missing, the FTA will reclassify the supply and charge back 5% VAT plus fines during the audit.
An example of an error: exporting services to a foreign client whose representative visited the UAE to sign a contract. The FTA may consider this as an "effective connection" and require VAT at the 5% rate to be paid.
Even if the visit was short (less than a month), it is considered "connected" to the supply if it included contract meetings. This is a typical "grey area" where mistakes are possible due to a lack of documents or misinterpretation.
Complex (Composite) Supplies and How to Classify Them
Composite supplies occur when one transaction includes both goods and services (for example, equipment plus installation). It is necessary to determine whether this is a single supply or several independent ones. The applicable rate depends on the answer.
Assessment criteria:
Is one part principal and the other ancillary?
Can the components be separated?
How are the contract and payment arranged?
Errors in Issuing Invoices and Their Cost
Mandatory Details
A tax invoice must include:
TRN of the supplier and buyer (if they have registration)
Date of supply
Unique invoice number
Description of goods or services
Quantity and price per unit
Amount excluding VAT
Rate and amount of VAT
Cost of a Mistake
A penalty of 5,000 dirhams applies for each incorrect invoice. For repeated violations, the total rises to 15,000.
Supplier error (e.g., missing TRN) deprives the buyer of the right to reclaim input VAT. This means that the tax must be paid out of pocket.
How to Avoid Problems
Use automated invoicing systems
Check incoming documents before accounting
Maintain a log of corrections and cancelled documents
Deadlines and Fines for VAT Declarations
Submission Deadlines
Quarterly — for companies with turnover up to 150 million dirhams
Monthly — for over 150 million dirhams
Submission deadline — 28 days after the end of the period.
Penalties for Violations
Late submission: First violation — 1,000 dirhams, repeat within 24 months — 2,000 dirhams.
Inaccurate data: Fixed fine of 3,000–5,000 dirhams, plus 5–50% of the shortfall (depending on circumstances).
Correcting Mistakes
Minor errors (shortfall up to 10,000 dirhams) can be corrected in the next declaration. Significant errors require voluntary disclosure within 20 working days.
Penalties for voluntary disclosure:
Before audit notification: 5% of the shortfall.
After notification but before the audit: 30%.
If the error is found by the FTA: 50%.
The 20-working-day deadline can be a challenge for complex errors requiring a large volume of data. If the FTA finds the error first, the penalties will be higher.
Errors in Determining the Place of Supply for Goods and Services
General Rules
Goods: The place of supply is where the transfer takes place.
Services: By default — the location of the supplier. However, there are many exceptions.
Cross-Border Transactions
B2B services: Often taxed where the buyer is located.
B2C services: Usually where the service is consumed.
Real estate services: Always where the property is located.
Common Mistakes
A consulting company from the UAE works with a client from Europe. It mistakenly applies 5% instead of the zero rate.
A foreign IT company sells software to clients in the UAE. It does not register for VAT, although it is obligated to.
Equipment with installation. All installation in the UAE, but the company considers this as export.
There are other cases — for example, a foreign architectural firm designs a building in Dubai and does not charge VAT, although the place of supply is the UAE.
The FTA emphasizes in clarification VATP040: In complex transactions, all circumstances must be considered — contract terms, actual place of service provision, and the status of the parties, not just the address on the invoice.
VAT in Free Zones: Features and Errors
Operational Principle
Designated Zones (DZ) for VAT purposes are considered outside the UAE — but only for goods and under certain conditions.
Important: This does not apply to services. They are taxed under the general rules.
Common Mistakes
Automatic application of exemptions. Not all operations in DZ are exempt from VAT.
Incorrect documentation. Movement of goods must occur under customs control with the appropriate documents.
Ignoring services. Even within DZ, most services are subject to standard VAT.
If the goods are ultimately consumed on the mainland or removed from the DZ without following procedures, VAT must be charged. The DZ status does not provide automatic exemption.
Errors in Reverse Charge VAT (RCM)
When it Applies
RCM (Reverse Charge Mechanism) works when:
You are importing goods or services.
The supplier is not registered in the UAE and is not required to register.
In this case, you account for and pay the VAT yourself.
Common Mistakes
Missing imported services. Unlike goods that pass through customs, services are less noticeable.
Incorrect calculations. Errors in determining the tax base.
Lack of documentation. A full tax invoice is required for RCM, rather than a simplified one.
RCM is often neutral in cash flow if all operations are taxed. But if there are exempt supplies, part of the input VAT may be non-reclaimable, leading to real losses.
Financial Losses from Errors: Direct and Indirect
Errors in VAT lead not only to fines but also to reputational and operational losses that can be more painful for businesses than financial sanctions.
Direct Losses
FTA fines grow with repeated violations. A company with significant document turnover may face a cumulative effect even from "small" fines for each incorrect invoice.
For example, during an audit, each incorrect invoice can incur a separate fine. For a company with hundreds of documents, this can result in significant amounts.
Indirect Losses
Reputational risks. Information about large fines affects relationships with banks and partners.
Operational challenges. Management's time is spent resolving tax disputes instead of growing the business.
Increased FTA scrutiny. After serious violations, the company falls into a risk zone for regular inspections.
Penalties and Additional Taxes
Penalties are applied to unpaid VAT:
2% immediately after the due date.
+4% after a week.
+1% daily after a month (up to a maximum of 300% of the amount).
According to some sources, 1% is applied monthly, so it is important to consult the latest clarifications from the FTA.
Business Protection System from VAT Errors
Effective VAT compliance is not a one-time action, but an ongoing process. It requires modern technology, employee training, internal control, and readiness to consult experts. Preventive measures cost businesses less than correcting the consequences of errors and paying fines.
Accounting Automation
Use software that supports UAE VAT:
Automatic tax calculation.
Generation of correct invoices.
Generation of declarations in FTA format.
Audit trail of all operations.
Pay attention to features of operations accounting in DZ, working with RCM, integration with ERP/CRM/POS, and timely updates in line with changes in legislation.
Staff Training
Regularly update the team's knowledge:
Changes in legislation.
Your industry's specifics.
Practical work with software.
Internal control procedures.
It is important to not only know "how to do it", but also to understand "why to do it" — this reduces the risk of formal errors.
Internal Audit
Conduct self-checks using checklists:
Relevance of registration.
Correct classification of operations.
Document compliance with requirements.
Data reconciliation between different systems.
Complete checklist example covering registration, accounting and documentation, classification, invoices, declarations, place of supply, RCM, operations in DZ, and input VAT. It should be adapted for your business.
Professional Support
Consult experts in complex situations:
Planning major transactions.
Changes in business structure.
Preparing for an FTA audit.
Resolving disputes with tax authorities.
Monitoring Changes
Keep track of updates through:
The official FTA website (tax.gov.ae)
Professional newsletters.
Industry seminars and conferences.
Increased FTA Control: New Risks for Businesses
The Federal Tax Authority of the UAE is increasingly using digital technologies to monitor compliance with tax legislation. Discrepancies between data from POS systems and amounts in VAT declarations, inconsistencies in FAF files are easily identified through automated analysis.
This means that even small inconsistencies between accounting systems and reporting can quickly come to the regulator's attention. Companies with high-quality and consistent accounting will have lower risks of inspections.
Conclusions
VAT in the UAE is no longer a "soft" tax system. The FTA is tightening control and actively applying sanctions.
Key principles for protecting against errors:
Proactivity. It is better to spend time correctly setting up processes than to pay fines.
Systematic approach. VAT affects all business processes, not just accounting.
Relevance. Legislation changes regularly, and knowledge needs to be updated.
Documentation. Quality primary documents protect against most claims.
Expertise. In complex issues, it is better to seek advice than to guess.
Companies that have established VAT processes gain a competitive advantage — lower operational risks, higher financial transparency, and trust from banks and partners. Investments in VAT compliance always pay off: the question is whether you pay for prevention or for fixing the consequences.
Legal support from the article's author
The article was prepared by Irina Ryzhakova — a licensed lawyer, registered tax agent in the UAE. If you need assistance with a legal matter, submit a request and receive a free consultation.
