Value Added Tax (VAT) in the UAE is a significant aspect for small and medium-sized enterprises (SMEs) to manage effectively. Ensuring VAT compliance not only helps businesses avoid penalties but also builds credibility and financial stability. Here’s a simple guide to best practices for VAT compliance in the UAE, with references to Federal Tax Authority (FTA) laws.

1.     Gaining knowledge about the tax regulatory authority in the UAE.

Businesses and individuals clearly understand the VAT system's governing bodies, ensuring better compliance, informed decisions, and smoother interactions with UAE tax authorities.

• UAE Federal Government: Provides the legal foundation for VAT as part of federal legislation and GCC commitments.
• Ministry of Finance (MoF): Develops national tax policy and represents the UAE in regional and international tax matters.
• Federal Tax Authority (FTA): Primary body responsible for VAT implementation, Manages registration, compliance, returns, audits, refunds, and taxpayer education.
• UAE Cabinet: Issues Cabinet Decisions and Executive Regulations that guide how VAT laws are applied.
• Tax Disputes Resolution Committees (TDRC): Handles taxpayer objections and appeals before judicial involvement.
• UAE Courts: Final legal authority for resolving VAT disputes escalated from the TDRC.

2.     Understanding VAT registration requirements and the associated benefits.

Federal Decree-Law No. 8 of 2017, Executive Regulation Cabinet Decision No. (52) of 2017, Cabinet Decisions on Value Added Tax and the related Clarification and guidelines issued by the Federal Tax Authority (FTA). SMEs need to determine if they must register for VAT based on their revenue:

• Mandatory Registration: A business must register for VAT if the total value of its taxable supplies and imports exceeds AED 375,000 over the previous 12 months or is expected to exceed that amount in the next 30 days. This threshold is compulsory and applies to all businesses operating in the UAE.
• Voluntary Registration: A business may choose to register for VAT voluntarily if the total value of taxable supplies or taxable expenses exceeds AED 187,500 over the past 12 months or is expected to exceed that amount in the next 30 days.
  This is helpful for small businesses or startups that wish to reclaim input VAT on their expenses and appear more credible to suppliers and customers.

Note: Taxable supplies include standard-rated supplies (5%), zero-rated supplies (0%), and reverse charge services but exclude exempt supplies (like residential rent and certain financial services).

Being VAT-registered can boost business credibility, reduce costs, and provide growth opportunities, registering for VAT in the UAE offers several benefits

1. Enhanced Credibility: Boosts business image and trust with clients and partners.
2. VAT Refund: Allows businesses to reclaim VAT on purchases, reducing costs.
3. Attracts Larger Clients: Larger organizations prefer VAT-registered businesses.
4. Legal Compliance: Required for businesses with taxable supplies over AED 375,000.
5. Competitive Advantage: Helps remain competitive by offsetting VAT costs.
6. Market Expansion: Facilitates international business and cross-border transactions.
7. Simplified Tax System: Streamlines tax processes and reduces errors.
8. Government Access: Opens doors to government contracts and programs.

3. Timely VAT Filing

Failing to register for VAT on time can lead to penalties. Once registered, businesses required to:

• File VAT returns on a quarterly or monthly basis, as per FTA guidelines.
• Ensure accurate VAT payments before the due date to avoid late penalties.

Timely VAT filing and payment ensures legal compliance, avoids penalties, maintains cash flow, and enhances business credibility and trust.

3. Proper Invoicing and Record-Keeping

The FTA mandates VAT-registered businesses to issue tax invoices as per the Article 59 of the The Executive Regulation of the Federal Decree-Law No. 8 of 2017 on Value Added Tax that including,

• VAT registration numbers (TRN)
• VAT amount and total invoice value
• Supplier and customer details

Keeping records for at least five years is essential to meet audit requirements all the business transaction (Taxable, non-taxable, transactions within UAE and outside the UAE ) should be back by valid evidence as per the prescribed in the Article 71 and 72 in the FAT law.

4. Claiming Input VAT Correctly

Businesses can recover VAT on eligible expenses, provided they have proper invoices. However, SMEs must ensure:

• Input VAT claims must be submitted within the FTA's specified time frame and should be supported by valid tax invoices.
• Expenses must be directly linked to business activities, with input VAT on non-recoverable expenses (e.g., personal expenses of owners and managers, certain entertainment costs) being fully or partially eliminated.

5. Avoiding Common VAT Mistakes

Common VAT errors made by SMEs due to insufficient understanding of VAT laws and changes include:

• Failing to register for VAT when required, leading to missed filings and payments.
• Incorrect application of the VAT rate (standard 5% or zero-rated), particularly when dealing with complex transactions, such as multi-component supplies, transportation, hospitality, and certain services, causing late or incorrect filings.
• Misunderstanding exemptions and reverse charge mechanisms
• Incorrectly claiming input VAT not allowed under FTA guidelines.
• Not updating FTA portal with valid and correct information.
• Failing to comply with the FTA timeline.

6. Staying Updated with FTA Regulations

VAT laws are subject to frequent updates, with the FTA regularly issuing new guidelines. SMEs must stay informed of all compliance requirements and changes, ensuring timely action to avoid non-compliance, potential violations, and penalties.

·         Seek professional tax consultation services.

• Train finance teams on VAT rules and changes.

7. Using Technology for Compliance

Using accepted accounting software for invoicing, VAT calculations and reporting helps minimize errors, ensures proper record-keeping, and facilitates timely submissions. Many SMEs in the UAE rely on cloud-based solutions for smooth VAT compliance. Furthermore, adopting the proposed e-invoicing process ensures accuracy, real-time reporting, and seamless reconciliation between B2B and B2G transactions. ( link to previous blog)

8. Carry Out an Independent VAT Health Check (VHC)

Conducting a VAT Health Check helps identify gaps in compliance, correct errors, and ensure alignment with the latest FTA regulations. Engaging an experienced tax consultant for this process provides valuable insights, ensures accuracy, and reduces the risk of penalties. Their expertise can help streamline your VAT processes and keep your business on the right track.

Conclusion

Complying with UAE VAT laws goes beyond just avoiding penalties it’s about fostering a transparent, efficient, and financially healthy business. SMEs that adopt best practices can concentrate on growth while staying fully compliant. At Crevaty UAE, we’re here to support you at every stage to help you achieve your tax compliance goals.

Need more guidance on VAT? Visit the FTA website (https://www.tax.gov.ae/) for official resources and updates.