Filing and Making VAT Payments in UAE

If you’re running a business in the UAE, VAT is something you can’t afford to overlook. But what does it really mean for you and your business? VAT or Value Added Tax affects everything from the products you sell to the services you provide. The tax is set at a standard rate of 5%, but the process of filing VAT returns and making payments can be tricky if you're new to it.

Failing to comply with VAT regulations can lead to penalties, fines, or even business disruptions. For example, failing to file your VAT returns on time can result in fines starting at AED 1,000, which can double with repeated offences.

In this guide, we’ll break down the step-by-step process of filing your VAT returns and making VAT payments in the UAE. We’ll cover everything you need to know to stay on track and keep your business in compliance.

What is VAT?

Value Added Tax (VAT) is an indirect tax applied to the supply of goods and services in the UAE. It was introduced on January 1, 2018, by the UAE government as part of its strategy to diversify its revenue sources and reduce dependence on oil revenues. This was a major change for the economy and businesses, requiring them to adopt new systems for managing taxes.

Purpose of VAT in the UAE Economy

The introduction of VAT in the UAE serves several vital purposes apart from its strategy to reduce its dependency on oil revenues. Here’s a breakdown of how VAT supports the UAE’s growth and development:

• Primary Revenue Source: Since its implementation, VAT has become a major revenue stream for the UAE government. By the end of the fiscal year 2023, VAT revenues at the state level reached AED 159.57 billion, with the federal government collecting AED 47.87 billion during the same period. 
• Support for Public Services: VAT funds are directly invested in essential sectors like healthcare, education, and infrastructure. 
• Encouraging Economic Transparency: VAT helps promote a more transparent environment. As businesses are required to maintain accurate records, it supports fair taxation and reduces the potential for fraud or tax evasion.
• Aligning with Global Tax Standards: As part of the global trend, the introduction of VAT enhances the UAE’s credibility on the global platform, promoting foreign investment and business opportunities.

Who Needs to Register for VAT?

In the UAE, not every business is required to register for VAT. However, if your business meets specific criteria, VAT registration becomes mandatory. Here’s a quick breakdown of who needs to register:

• Mandatory Registration: If your business generates taxable sales (goods and services subject to VAT) exceeding the mandatory threshold of AED 375,000 annually, you are required to register for VAT. This also applies to businesses that expect their taxable supplies and imports to exceed the threshold within the next 30 days.
• Voluntary Registration: If your business has taxable supplies between AED 187,500 and AED 375,000, you can choose to register for VAT voluntarily. 

VAT Registration: Everything You Need to Know

Once you've confirmed that your business needs to register for VAT—either mandatorily or voluntarily, follow these steps to complete the process through the Federal Tax Authority (FTA) portal.

Step 1: Gather Required Documents: To begin your VAT registration, make sure you have the necessary documents ready. These documents are required by the FTA to verify your business and ensure your application is processed smoothly:

• Valid Trade License: A copy of your current trade license.
• Identification Documents: Passport copies or Emirates IDs of authorised signatories.
• Proof of Authorisation: Documentation confirming the authority of signatories to register the business for VAT (if applicable).
• Business Contact Information: Your business address and PO Box details.
• Bank Letter: A letter from your bank validating your business account details.
• Financial Statements: Audit reports or financial statements, which may be required depending on your business.
• Additional Documents: Depending on your business structure, you may need to submit Articles of Association or partnership agreements.

Please note: All documents must be up-to-date and accurate to avoid delays in the registration process.

Step 2: Create an FTA Account: Next, visit the FTA’s official website and create an e-Service account. This account will give you access to the VAT registration form and other online services provided by the FTA. Make sure to keep your login credentials safe, as you will use this account for all VAT-related activities, including submitting returns and making payments.

Step 3: Complete the VAT Registration Form: Log into your FTA account and fill out the VAT registration form. You’ll be asked to provide detailed information about:

• Your business activities and operations
• Estimated turnover and taxable supplies
• Banking details

Step 4: Submit Your Application: Once you’ve filled out the registration form, review it for accuracy before submitting it. Double-check all the details, especially your contact and financial information, and submit your VAT registration form through the FTA portal.

Step 5: Attach Required Documents: Attach the supporting documents required by the FTA to verify the information provided in your application. The FTA will review your application and may request additional information if necessary. This review process typically takes around 20 to 30 working days.

Step 6: Receive Your Tax Registration Number (TRN): Once your application is processed and approved, you will receive a Tax Registration Number (TRN) and a VAT certificate from the FTA. This number is essential as it’s your official identification as a VAT-registered business in the UAE. You must include this TRN on all invoices and transactions subject to VAT.

Once you’ve successfully completed the VAT registration process, the next step is to understand how to calculate VAT payments.

Calculating VAT Payments in the UAE

As we know, VAT is levied at a standard rate of 5% on most goods and services in the UAE. As a business owner, you need to understand two primary components of VAT:

• Output VAT: This is the VAT you collect from your customers when you sell goods or services. It’s calculated based on the sale price of your products or services.
• Input VAT: This is the VAT you pay on purchases made for your business, such as raw materials or services. You can reclaim this amount when filing your VAT returns.

Here’s the formula to determine your VAT liability:

VAT Payable = Output VAT − Input VAT

If your output VAT exceeds your input VAT, you will owe that difference to the tax authorities. On the other hand, if your input VAT is greater, you may be eligible for a refund.

Calculation Methods

There are two common methods used to calculate VAT:

1. Adding VAT to the Sale Price

In this method, you calculate the VAT and add it to the sale price. Here’s how:

• Calculate the VAT Amount:

VAT Amount = Sale Price × 0.05

• Calculate the Gross Amount (Including VAT):

Gross Amount = Sale Price + VAT Amount

Example: If you sell a product for AED 1,000, the calculation would be:

• VAT Amount:  1,000 × 0.05 = AED 50
• Gross Amount:  1,000 + 50 = AED 1,050

2. Excluding VAT from the Sale Price

In this method, the sale price includes VAT. To calculate the VAT, you need to extract the VAT portion from the total sale price. Here’s how to do it:

• Calculate the Net Sale Amount (Excluding VAT):

Net Sale Amount = Sale Price ÷ (1 + 0.05)

• Calculate the VAT Amount:

VAT Amount = Sale Price - Net Sale Amount

Example: If a product is priced at AED 1,050, then:

• Net Sale Amount: 1,050 ÷ 1.05 = AED 1,000
• VAT Amount: 1,050 − 1,000 = AED 50

Now that you know how to calculate your VAT payments in the UAE, the next step is to file your VAT returns.

Filing VAT Returns in the UAE

Filing VAT returns is a crucial responsibility for any business registered under the UAE VAT system. By accurately reporting your VAT activities, you ensure compliance with tax regulations and avoid potential penalties. 

What Are VAT Returns and Why Are They Important?

A VAT return is a document that businesses submit to the Federal Tax Authority (FTA) to report their sales and purchases and the amount of VAT they owe or can claim back. 

The primary purpose of filing VAT returns is to ensure transparency in your business’s tax activities and to comply with the UAE’s tax laws. It also allows businesses to settle their VAT liabilities accurately or claim refunds for any excess VAT paid.

Key Deadlines for Filing VAT Returns

Timely submission of VAT returns is essential to avoid penalties. Here are the key deadlines you need to keep in mind:

• Monthly Filling: For businesses filing monthly, VAT returns are due by the 28th day of the month following the tax period. For example, if you’re filing for January, the return would be due by February 28th.
• Quarterly Filling: For quarterly filings, returns are due by the 28th day of the month following the end of the quarter. For instance, if your quarter ends in March, your return is due by April 28th.

Overview of the VAT Return Form (VAT 201)

The VAT return form “VAT 201” is used to submit your VAT details to the FTA. The form is divided into different sections, where you’ll report your taxable supplies, output VAT, input VAT, and any net VAT payable or refundable. Here's a breakdown of what you'll need to fill in:

• Tax Period: Indicate the tax period (monthly or quarterly) that corresponds to the return you're filing.
• Taxable Supplies: Report the total amount of taxable supplies made during the period.
• Output VAT: Report the VAT you’ve collected from customers.
• Input VAT: Report the VAT you’ve paid on business purchases.
• Net VAT: This is the difference between your output VAT and input VAT. If output VAT exceeds input VAT, you owe the difference to the FTA. 

Steps to File a VAT Return in the UAE

Here's a detailed guide on how to file your VAT return in the UAE.

Step 1: Preparation:  To file a VAT return, you need to calculate your total taxable supplies for the reporting period. This includes summing up all sales subject to VAT, which can include both standard-rated (5%) and zero-rated supplies. Prepare all your records of sales and purchases, like all invoices that detail the VAT you’ve charged and paid. 

Step 2: Filing Process: Once you’ve gathered your records and calculations, follow these steps to file your VAT return:

• Log into the FTA Portal: Access the FTA e-Services portal using your registered username and password, or log in using UAE Pass for a more secure sign-in. Once logged in, navigate to the ‘VAT’ section of the portal.
• Complete the VAT Return Form (VAT 201): After logging in, fill out the online VAT return form (VAT 201). 
• Review: Before submitting your VAT return form, thoroughly review all the information to ensure everything is correct. Mistakes in your calculations can lead to penalties or the need to file amended returns.
• Submission: Once everything is accurate, submit your VAT return form through the FTA portal. The portal will confirm that the submission was successful, and you’ll receive an acknowledgment receipt.

Step 3: Payment of Due Tax: If your return shows a VAT liability, make sure to pay the due amount by the deadline. You can pay via the FTA portal using e-Dirham cards or bank transfers.

Step 4: Keep Records of Your Submission: After submission, save a copy of the VAT return and the payment receipt of your records for at least five years as mandated by the FTA.

Making VAT Payments in the UAE

Once you've filed your VAT return, it’s crucial to make the payment on time to ensure compliance with Federal Tax Authority (FTA) regulations. The UAE offers several convenient methods for businesses to settle their VAT liabilities.

Payment Methods Available

• e-Dirham Card Payments: The e-Dirham card is a popular and secure way to make VAT payments. This prepaid card is specifically designed for government transactions in the UAE, ensuring quick processing of your payment.
• Credit Card Payments (Visa and MasterCard): Businesses can easily pay VAT liabilities using Visa or MasterCard through the FTA portal. 
• eDebit Option Through Internet Banking: The eDebit option allows businesses to make direct payments from their bank accounts.
• Local Bank Transfers Using GIBAN: Local businesses can transfer VAT payments directly from their bank accounts using GIBAN (Government IBAN). 
• International Bank Transfers: For businesses dealing with international clients or foreign currencies, international bank transfers are also accepted. 

Once you've made your VAT payments, it's important to stay prepared for potential VAT audits and inspections.

Dealing with VAT Audits and Inspections

The Federal Tax Authority plays a key role in conducting VAT audits to ensure businesses comply with tax laws. They conduct audits to verify that the tax returns filed by businesses match the taxable supplies made and that the correct amount of VAT has been paid. Audits may be triggered if the FTA notices discrepancies in tax filings or if businesses are randomly selected for review. You’ll typically receive a notification at least five business days in advance, giving you time to prepare for the audit.

The Audit Process

Here’s what you can expect during a VAT audit:

1. Notification from the FTA: As mentioned earlier, the FTA will notify you ahead of time about the audit. You’ll get details such as the schedule, location, and the individuals involved.

2. Required Documents: During the audit, you will need to provide various documents, including:

• Tax invoices and records of all sales and purchases.
• Documentation supporting your VAT calculations.
• Records of exempt supplies or zero-rated supplies, if applicable

3. Site Visits and Interviews: The FTA auditors might visit your business premises. They could also interview key personnel to understand your operations better and assess whether you’re complying with VAT regulations.

4. Review of Accounting Systems: The auditors will review your accounting software and systems to ensure compliance with UAE VAT laws. This includes verifying that your software can generate the necessary reports and data required by the FTA.

5. Final Assessment: After completing the audit, the FTA will notify you of their findings. If they find discrepancies that result in underpayment or over-claiming input VAT, you may receive a notice requiring payment of the owed VAT along with any applicable penalties.

After handling audits, it's important to understand VAT exemptions to minimise liability and avoid issues.

VAT Exemptions in the UAE

Understanding VAT exemptions and zero-rating is essential for businesses in the UAE. 

VAT Exemptions vs. Zero-Rating

Let’s distinguish between VAT exemptions and zero-rated supplies, as they both have a big impact on your VAT obligations:

Exempt Supplies: These are goods and services that are not subject to VAT at all. Common exempt supplies in the UAE include:

• Financial services, particularly those offered without an explicit fee, commission, or discount, are exempt from VAT. This includes services like life insurance. Furthermore, financial services provided to customers outside the Gulf Cooperation Council (GCC) are also exempt.
• The supply of residential properties is generally exempt from VAT. So, when you purchase or lease a residential building—unless it's specifically zero-rated—you won’t incur VAT on those transactions.
• Public transport services within the UAE, such as buses, taxis, and trams, are exempt from VAT. 

The key takeaway here is that businesses providing exempt supplies cannot reclaim VAT on related purchases or expenses.

Zero-Rated Supplies: These are items that are taxed at a 0% VAT rate, meaning VAT is technically charged but at a rate of 0%. Some examples include:

• Healthcare: Many healthcare services are either exempt from VAT or zero-rated, ensuring that residents have access to affordable healthcare.
• Education: Like healthcare, education services provided by recognised institutions are often zero-rated. This ensures that students and educational institutions aren’t burdened with VAT costs, making education more affordable and accessible.

The benefit of zero-rating is that businesses can reclaim input VAT on purchases related to these supplies.

What are Partial Exemptions?

Partial exemptions apply when your business offers a combination of taxable and exempt goods or services. If that’s the case, you can’t fully reclaim the VAT on your purchases. You’ll only be able to recover VAT on the costs directly related to your taxable activities. It’s all about ensuring you’re not over-claiming VAT on expenses that aren’t directly tied to your business’s VAT-able services.

Now that you're familiar with VAT exemptions, it's important to understand the potential consequences of non-compliance

Consequences of Non-compliance in the UAE

Non-compliance with VAT regulations in the UAE can lead to significant financial and legal repercussions for businesses.

Penalties for Non-compliance

1. Late Filing of VAT Returns: If you fail to file your VAT return on time, you face a penalty of AED 1,000 for the first offence. If this violation occurs again within 24 months, the penalty increases to AED 2,000.
2. Late Payment of VAT: When VAT payments are not made by the due date, an immediate penalty of 2% on the unpaid tax is applied. If the payment remains overdue for more than seven days, an additional 4% penalty is incurred. After one month, a daily penalty of 1% applies until the total penalties reach a maximum of 300% of the unpaid amount.
3. Failure to Issue Tax Invoices: Failure to issue tax invoices can result in a fine of AED 2,500 for each missed invoice. 
4. Failure to Display Prices Inclusive of VAT: Businesses must display prices that include VAT; otherwise, they face a penalty of AED 5,000 for each location where this requirement is not met.
5. Incorrect Tax Return Submissions: Submitting incorrect tax returns can lead to penalties starting at AED 3,000 for the first offence and increasing to AED 5,000 for repeated errors within 24 months.
6. Failure to Maintain Records: Businesses are required to keep accurate records as per tax regulations. Failure to do so incurs a fine of AED 10,000 for the first offence and up to AED 50,000 for repeated violations.

Legal Consequences

Beyond financial penalties, non-compliance can lead to serious legal consequences:

1. Legal Action by the FTA: Persistent non-compliance may result in audits and investigations initiated by the FTA. In extreme cases, businesses may face legal actions that could include criminal charges.
2. Imprisonment and Heavy Fines: Depending on the severity of the violation, intentional non-compliance can lead to imprisonment for up to two years and fines of up to AED 500,000.

How Alaan Helps with VAT Compliance for UAE Businesses

Alaan is a comprehensive expense management platform designed to help businesses comply with VAT regulations efficiently. By automating key processes and ensuring accurate reporting, we simplify VAT compliance for UAE businesses.

Key Features of Alaan’s Platform

• Automated VAT Data Capture and Expense Tracking: At Alaan, we extract VAT details from uploaded receipts and match them with transactions. It helps you categorise expenses accurately, reducing the manual workload and ensuring compliance with applicable VAT rates.

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• Real-Time Financial Insights: We provide you with real-time visibility into spending patterns, offering a clear picture of VAT-related expenses and overall cash flow.
• Efficient Receipt Management: With Alaan, you can store and retrieve digital receipts with ease. Centralising all your receipts ensures you’re always audit-ready and have access to the necessary documentation when you need it.
• Accuracy and Reduced Errors: We minimise the risk of errors in VAT reporting by automating data entry and validating tax codes where applicable. This helps you avoid penalties and ensures compliance with Federal Tax Authority (FTA) standards.
• Accounting Integration: At Alaan, we integrate with leading accounting platforms such as QuickBooks, Xero, and Zoho Books. This ensures that VAT data is seamlessly synced for accurate and timely reporting.

Conclusion

VAT compliance is a must for every business in the UAE. By registering, filing returns and making payments on time, you can avoid penalties and maintain smooth operations. At Alaan, we help you manage VAT with ease. Our platform automates VAT tracking, categorisation, and reporting, making it easier for you to stay compliant without the hassle. 

If you’re looking to streamline your VAT process, schedule a free demo with us today to see how Alaan can help.