Most Common Business Mistakes Related to VAT & their Penalties

All the registered businesses in the UAE are subject to VAT Laws and regulations by FTA. Those struggling with tax regulations in the UAE must sort out their tax issues because, in the case of non-compliance, businesses face hefty penalties and legal consequences. 

In case of breaching VAT laws, penalties are imposed by the authorities on the taxable businesses ranging to thousands of Dollars. A taxable person has a complete right to object an administrative penalty imposed on their business. A request can only be made in the presence of a valid reason for reconsideration and evidence. 

Common Mistake Businesses Make Relating VAT

Government authorities in the UAE make sure every business operating in the country is fully complying with official tax regulations. VAT is relatively new in UAE, so the chances are that your business might unintentionally make mistakes which result in hefty penalties. 

On that note, here are the most common mistakes made by businesses when it comes to VAT and associated penalties. 

Failure to display prices inclusive of VAT on products and services

All businesses in the UAE that have registered for VAT have to display prices on their goods and services inclusive of VAT. There are, however, exemptions as mentioned below:

• Business supplies are to be exported out of UAE
• Imported goods 
• The customer also has a business that is tax-registered with FTA

Except for the above-mentioned cases, if a business that is VAT registered in UAE fails to display prices on goods inclusive of VAT that is to be paid by every client and customer, then they will face a penalty of AED 15,000. And keep in mind that this penalty has to be settled immediately. 

Failure to comply with regulations in relation to the storage and moving of goods in designated zones

The government of UAE has designated some zones as VAT free zones, and these are outside UAE’s VAT jurisdiction. According to the Cabinet decision, “Although designated free zones are part of the UAE territory, for VAT purposes, they are to be treated as being outside the UAE.” Goods that are transferred into these designated zones are not charged with VAT. 

However, if the transfer of goods into a designated zone occurs from a non-designated zone in UAE, it will not be treated as zero-rated VAT goods (they will be charged with VAT). There are a lot of complexities in regard to the treatment of VAT in designated areas. It is advised to consult a tax agent in UAE to avoid facing legal consequences. 

As for the penalty, a VAT registered business that does not comply with the regulations of the designated zones, a penalty amounting to AED 50,000 will be imposed. The penalty could also be 50% of the total tax that is charged due to violation of rules and regulations of FTA, 

Failure to notify FTA regarding recharge of tax based on margins

All registered businesses in the UAE are to calculate the total VAT amount based on their profit margins for supplies of their goods. These also include stamps and second-hand products, etc. Therefore, the profit margin is calculated by subtracting the selling price of the product from its price of purchase. 

Similarly, VAT is calculated on profit margins rather than the price of purchase. However, failure to inform FTA with regards to tax on profit margin, be-it intentional, or unintentional results in a penalty of AED 2,5000. 

Failure in issuing tax invoices to clients or any other transaction 

Whenever the supply of taxable goods or services takes place, businesses need to issue a tax invoice to the customer or a client. However, if a company fails to issue the tax invoice or any other alternative document that shows that a transaction took place, a penalty worth AED 5,000 is imposed on them. 

Don’t forget that this penalty is for one single invoice. So if your company has missed a couple of invoices, the penalty amount will increase accordingly. Therefore, it is advised to get in touch with a company that provides one of the best VAT consultancies in Dubai to avoid these hefty penalties and fines. 

Failure in issuing of tax credit and e-tax credit notes as well as invoices to clients and customers

Tax credit notes are either written or electronically produced documents that notify any amendments or changes done to taxable supplies, including any canceling or reduction in the recorded supplies. Similarly, a registered business in UAE can issue e-tax invoices and credits if:

• A business can store and secure copies of electronic tax invoices and credits as per FTA record-keeping guidelines
• Businesses can guarantee the authenticity and integrity of the origins of all e-tax invoices and credit notes. 

Failure of businesses to issue tax credit and notes will lead to an administrative penalty by FTA of AED 5,000 for every SINGLE tax credit note that was not issued by the company. The same goes for electronic tax invoices and credit notes. 

Get Consultation and Avoid Penalties!

All the registered taxpayers in the UAE should take note of the mistakes mentioned above and penalties imposed by FTA. We suggest that if you want to make sure that your company is falling all the regulations related to VAT in UAE, then consult a regulated VAT expert or tax agent in UAE to avoid hefty penalties. 

Originally posted 2020-05-11 10:07:03.