Mistakes to Avoid when Filing VAT Returns in the UAE
Value Added Tax commonly also known as VAT was introduced in UAE on January 1st, 2018, which obligated all business entities to comply with the requirements of the new VAT LAW. UAE entails VAT on tax-registered businesses at a rate of 5 percent on a taxable supply of goods or services at each step of the supply chain.
A company is obligated to register for VAT if its taxable supplies & imports exceed AED 375,000 per annum. It is optional for businesses whose supplies & imports exceed AED 187,500 per annum.
Filing of tax returns to the FTA (Federal Tax Authority) is one of such requirements which is to be followed by the firms registered for VAT. Hence, the firms must be cautious while filing the return because a slight error will result in unavoidable penalties & fines.
Below are discussed the most common mistakes businesses need to avoid when filing VAT returns:
1. Defining sales in the wrong Emirate:
Most businesses often make the mistake of declaring the sales in the wrong emirate while filing VAT returns in the UAE. This error usually occurs when the business owners categorize their standard rated sales with respect to the customer’s location. However, you are required to categorize your standard-rates sales based on the fixed establishment. A fixed establishment is any fixed place of business where you consistently perform business activities.
2. Forgetting to Include Zero-rated & Exempt Sales:
The majority of the organizations file the output & input VAT correctly but forget to mention zero-rated & exempt sales. Business owners erroneously assume that only standard-rated transactions are required to be mentioned in the UAE VAT returns. Tax agents in Dubai firmly suggest you mention zero-rated & exempt sales accurately & disclose them properly in the VAT return filing.
3. Claiming VAT Return on Expenses that are not Permissible:
Certain business encounter expenses on a day-to-day basis. However, the UAE VAT Law does not allow the taxable person to recover VAT incurred on certain expenses. However, due to the inadequacy of the right knowledge, many businesses mistakenly claim expenses that are not permitted. A taxable person often perpetrates such missteps when they fail to get assistance from experienced VAT auditors.
The following are certain expenses on which input VAT recovery is not allowed under VAT in the UAE:
Motor vehicles used for personal purposes
Employee related expenses
4. Failing to comply with Reverse Charge Mechanism:
Companies must report for Reverse Charge Mechanism (RCM) while importing goods or services into the UAE. In regular transactions, the goods are supplied & VAT is collected on behalf of the customers, which will be given to the government later. Under RCM, the trader is not required to pay for the VAT on import products. The buyer or end customer is compelled to pay the tax directly to the government under RCM. Oblivious to this law, many companies fail to report for RCM while filing VAT returns in the UAE.
5. Making errors whilst calculating VAT:
The most significant part of filing truthful VAT returns is the application of the correct VAT rates. However, corporations make mistakes in recognizing the relevant VAT rate for the goods & services, thereby resulting in major errors in calculations & payments, which may lead to penalties.
6. Error in the practice of using adjustment columns
Enterprises fail to comply in comprehending the actual usage of adjustment columns in the VAT returns filing process. The main purpose of requiring an adjustment column is to provide the regulation for bad debts or changes resulting from sales of commercial property. However, businesses have a propensity to use the adjustment columns for correcting errors done in previous VAT returns filed. This indicates a variation in the numbers, which might further lead to questioning & analysis from the FTA and/or penalties. Therefore, businesses must be extra cautious in understanding the purpose of each column of information expected to be filled in the VAT returns form.
How can we help?
Once the appropriate systems and processes are in place, Brooks Management Consultancies can help with the administration of VAT in your business, to ensure you comply with the new requirements such as:
- How to charge VAT on supplies at the correct rate
- How to calculate VAT deductible on purchases
- How to calculate the overall net amount to pay and refund the VAT
- Submitting VAT and returns showing the required information
- Paying the net amount of VAT due within the prescribed deadlines.
Brooks Management Consultancies is also an FTA Certified Tax Agency Dubai, UAE, that provides unbeatable tax filing and returns services to companies. We have a fixed fee structure for local and international clients. Our tax agents focus on maintaining cordial and long-term relationships with our clients. Our agency has structured its fee and operations that will benefit our clients, whether individuals or companies.