VAT Late Payment Penalty in UAE 

The UAE government introduced Value Added Tax (VAT) in 2018 to reduce the country’s dependence on oil revenues and broaden its economic horizons. However, the implementation of VAT comes with various rules and clarifications, which mandate businesses to comply with the guidelines of the FTA (Federal Tax Authority) to maintain a good standing and avoid legal consequences, including VAT late payment penalty UAE. 

Under the UAE VAT law, qualifying businesses are required to complete their VAT registration, file VAT returns, and pay the tax accurately and timely to prevent any non-compliance issues that may lead to substantial financial loss or even disrupt business operations. 

In this blog, we will be discussing different aspects of the FTA late payment penalty UAE, their applicability in different circumstances, and how you can avoid them. 

The overview of Value Added Tax (VAT) in the UAE 

On January 1, 2018, the UAE introduced a consumption tax, commonly known as VAT, at a standard rate of 5% on most goods and services. However, it categorizes a few supplies as zero-rated or exempt from VAT. 

Here are some key points about UAE VAT:

• The standard VAT rate is 5% applied to most goods and services. 
• Certain supplies, such as exports, international transportation, certain medical and educational services, and the first sale of residential real estate, fall under the zero-rated category. 
• Goods and services like financial services, local passenger transport, and bare land are completely exempt from VAT. 
• Businesses with taxable income exceeding AED 375,000 in the past 12 months or expected to surpass that amount in the next 30 days are required to register for VAT with the relevant tax authorities. 
• Businesses with taxable income exceeding AED 187,500 can opt for voluntary registration. 

To monitor VAT and other federal taxes within the country, the government has appointed the Federal Tax Authority, which ensures that businesses comply with VAT rules and imposes penalties in cases of non-compliance. 

VAT late payment penalty UAE: Explained 

The concept of VAT penalties imposed by the FTA is to encourage businesses to comply with the rules, rather than just punishing them with substantial fines and penalties. Through the UAE VAT late payment penalty, FTA ensures that all businesses contribute fairly to the UAE’s economy. 

In this section, we will explore the different types of penalty for late payment of VAT in UAE and the conditions under which they are imposed.  

1.Late VAT Registration Penalty 

Businesses in the UAE that cross the mandatory registration limit must register for VAT within 30 days. Failing to do so within the specified time may result in a penalty of AED 10,000, as per the Cabinet Decision No. (49) of 2021 issued on April 28, 2021. Previously, it was AED 20,000. 

The extended consequences of a delayed registration may include the following: 

• Disrupted Operations: Delays in obtaining a Tax Registration Number (TRN), which is mandatory for tax invoice issuance and input tax credit claim, further impacting the company’s ability to conduct business with other VAT-registered entities.  
• Missing Out on Savings: Inability to reclaim VAT paid on business purchases, potentially increasing the overall tax burden of the business. 

2. Late VAT Deregistration Penalty 

When the company no longer meets the registration threshold, it must deregister for VAT to avoid a penalty of AED 1,000 for delayed deregistration, capped at a maximum of AED 10,000. Previously, the penalty was AED 10,000. 

The possible effects of this situation, other than the VAT late payment penalty UAE may include: 

• Continued Compliance Burden: VAT compliance is necessary even after the deadline, until the deregistration is officially approved. Businesses that fail to file the VAT returns within the approved timeline may invite penalties for non-compliance.  
• Administrative Requirements: Businesses must ensure to meet the administrative requirements, such as filing VAT returns, maintaining accurate books of accounts, and upholding communication with the FTA until the deregistration is officially approved. 

The submission of the final tax return and the payment of pending tax should be made within 28 days from the date of deregistration to prevent any VAT late payment penalty in UAE. 

3. Late VAT Return Filing Penalty

The UAE VAT law mandates businesses to submit their VAT returns within 28 days of the end of the accounting period. Failing to fulfil this obligation within the timeframe specified by the FTA may invite a penalty of AED 1,000 for the first offense, and AED 2,000 for repeated non-compliance within 24 months.  

Furthermore, if the business continues to fail to file the return as per the rules, the FTA has every right to take legal action against them. 

The other consequences of late filing of VAT return are as follows: 

• Delayed Refunds: Delays in receiving a VAT refund, potentially impacting the cash flow of the company. 
• Tax Assessment: A comprehensive audit by the FTA, which may be a time-consuming and stressful experience for the business. 

4. Late Payment Penalty VAT UAE 

Taxable entities in the UAE that fail to settle their VAT dues within the specified timeframe may have to face a fine for late payment of VAT in UAE. The penalty amount is calculated in the following way: 

• 2% of the unpaid tax, right after the deadline. 
• An additional 4% on the seventh day following the deadline. 

If the company fails to pay the outstanding VAT within one month after the deadline, 1% daily penalty will be imposed on the pending amount, capped at a maximum of 300% of the original tax amount. Beyond the VAT late payment penalty UAE, the legal consequences may also include potential legal action by the FTA. 

5. Penalty for Submission of Incorrect Tax Return 

Submitting an incorrect tax return may cause a penalty of AED 3,000 for the first violation, and AED 5,000 for repeated violations within 24 months. 

The supplementary aspects beyond the initial penalty are: 

• Tax Shortfall: A liability of paying the difference and potential interest charges. 
• FTA Audit: Tax audit by the tax authorities. 

6. Penalty for Non-maintenance of Proper Books of Accounts 

Maintaining proper books of accounts is an ethical business practice and at the same time, a legal requirement in the UAE. Businesses are required to maintain records of their transactions, including invoices, receipts, bank statements, and other documents.

Failing to keep the required documents and other information may lead to a penalty of AED 10,000 for the first offence and AED 50,000 for repeated non-compliance within 24 months. 

Beyond fines and penalties, the additional drawbacks of neglecting bookkeeping may include: 

• Cash flow issues: Difficult to track finances effectively. 
• Delayed Refunds: Inability to claim input tax credits and get VAT refunds. 

Common reasons for late payment of VAT 

Several factors may lead to VAT penalty for late payment UAE:

• Cash flow issues – Due to slow sales, unexpected expenses, or other financial challenges. 
• Accounting errors – Mistakes in calculating or recording VAT. 
• Lack of awareness – No knowledge of VAT obligations and deadlines. 
• System failures – Technical issues with the FTA e-Services portal or a business’s internal accounting software. 

VAT Payment Deadline in UAE 

Businesses are required to settle their VAT payments with the Federal Tax Authority (FTA) within 28 days after the end of the tax period. Any delays or negligence can result in penalties or other significant damages.  

Essential tips to avoid FTA late payment penalty UAE 

By following these tips, you can avoid UAE VAT penalty for late payment:

1. Maintain Accurate Financial Records: 

Meticulous record-keeping is the foundation of timely VAT reporting and avoiding late payment penalties. Hence, to ensure accuracy, businesses must do the following: 

• Detailed Transaction Recording: Record all transactions with supporting documents like invoices and receipts for accurate calculation of VAT. 
• Accounting Software Integration: Use accounting software with built-in features to automate VAT calculations and reporting and simplify compliance. 

2. Implement a VAT Compliance Calendar: 

Creating a dedicated VAT calendar with reminders can help businesses stay systematized and avoid missed deadlines for submissions of VAT returns. 

3. Reconcile Accounts Regularly: 

Regular reconciling of accounts can ensure that the financial statements and VAT records are accurate and in sync. Reconciliation helps detect and resolve any discrepancies in accounts. 

4. Plan for VAT Payments: 

Plan VAT payments in advance to avoid VAT late payment penalty UAE. Businesses must allocate dedicated funds for covering VAT obligations in order to prevent cash flow issues and potential late fees. 

5. Early VAT Return Submission: 

Submit VAT returns well before the deadline. This will provide a buffer time in case of technical issues or delays in filing. 

7. Conduct Internal Reviews and Audits: 

Businesses must conduct proactive internal reviews and audits of their VAT procedures to identify and address potential compliance issues before they escalate. This will minimize the risk of non-compliance and potential penalties. 

8. Stay Updated on VAT Regulations: 

The VAT regulations in the UAE are provisional. Hence, to stay informed, businesses must do the following: 

• Regularly check the FTA website: It is a reliable source to stay updated on the latest VAT regulations and announcements. 
• Seek updates from a Tax advisor: The tax advisor of Dubiz can keep you informed about any relevant changes to VAT regulations. 

9. Consider VAT Grouping: 

Business owners who manage multiple businesses under a single control can explore the option of VAT grouping, where they can submit a single VAT return and simplify the compliance process. 

10. Use the Technology: 

To streamline VAT management, businesses must use modern technology solutions: 

• Cloud-Based VAT Tools: Cloud-based platforms with in-built features can help with automated record-keeping, reporting, and payment processing. 
• E-Invoicing Systems: Automate invoice generation by implementing e-invoicing systems. This will ensure compliance with VAT invoicing requirements. 

11. Seek Expert Guidance: 

Partnering with a tax professional like Dubiz, who is well-versed in UAE tax regulations, can offer valuable support by: 

• Navigating VAT Compliance Complexities: Guide businesses through the complexities of VAT compliance and ensure timely submissions of VAT applications. 
• Expert Advice: Help businesses navigate complex transactions and ensure adherence to VAT regulations. 

Conclusion – VAT late payment penalty UAE

Thus, complying with the VAT regulations and adhering to the VAT system in the UAE is crucial to maintain the financial health of the company and ensure smooth operations. The aftermath of non-compliance can be substantial and significantly impact the financial well-being of the business.  

By prioritising accurate record-keeping, timely filing, and proactive planning, businesses can effectively meet their VAT obligations and significantly reduce the risk of VAT late payment penalty UAE.  

Stay ahead of VAT late payment penalty in UAE with Dubiz! 

Dubiz has a team of experienced and qualified auditors and tax advisors who offer comprehensive VAT solutions, including VAT registration, VAT filing, tax consultations, dispute resolution, and more to businesses across various industries.  

They will help you understand your VAT responsibilities and improve your VAT compliance to ensure the smooth and efficient functioning of your business. 

Contact Dubiz today! 

• Call: +971 563695485 
• WhatsApp: +971 563695485 
• Email: info@dubiz.co 

Disclaimer: The VAT policies in the UAE are subject to change and updates. It is advisable to seek expert help to avoid any confusion. 

Frequently Asked Questions (FAQs)