The United Arab Emirates (UAE) implemented a Value Added Tax (VAT) system on January 1, 2018, as part of its efforts to diversify revenue sources and reduce dependency on oil. The VAT system has brought about significant changes to the country’s taxation framework. To ensure compliance, the UAE has set up strict regulations and penalties for businesses that collect VAT without proper registration. In this blog post, we will explore the concept of VAT collected without registration and delve into the penalties imposed on non-compliant businesses in the UAE.
Understanding VAT Registration:
Before we dive into the penalties, let’s briefly understand the VAT registration process in the UAE. Any business that meets the mandatory threshold for VAT registration must register with the Federal Tax Authority (FTA) within the specified timeframe. The mandatory threshold is an annual turnover of AED 375,000 or more. Voluntary registration is also possible for businesses below the threshold.
VAT Collected Without Registration:
VAT collected without proper registration refers to the scenario where a business, knowingly or unknowingly, charges VAT on its supplies but fails to register for VAT or obtain the necessary tax registration number from the FTA. This can occur due to various reasons, such as negligence, misunderstanding the registration requirements, or intentionally evading tax obligations.
Penalties for VAT Non-Compliance:
The UAE government takes VAT compliance seriously and imposes strict penalties on businesses found guilty of collecting VAT without registration. Let’s take a look at some of the penalties that can be levied:
- Administrative Penalties:
For businesses that fail to register for VAT within the mandatory threshold or voluntary registration limit, the FTA may impose administrative penalties. The penalty amount is AED 10,000 for each taxable person who should have registered but failed to do so. It’s important to note that this penalty is per taxable person, which means multiple penalties may apply if a group has more companies.
- Paying VAT Collected:
Businesses that collect VAT without registration are still liable to remit the collected VAT to the government, even if they failed to register on time. They must pay the collected VAT to the FTA within the specified timeframe. Non-compliance in remitting the collected VAT may result in additional penalties and interest charges.
- Fines and Legal Actions:
Apart from administrative penalties, businesses found guilty of collecting VAT without registration may face fines and legal actions. The UAE government has the authority to conduct audits, investigations, and impose stricter penalties, including higher fines and potential criminal charges, depending on the severity of the non-compliance.
Examples of VAT Non-Compliance Cases:
To illustrate the consequences of VAT collected without registration, let’s consider a couple of hypothetical examples:
Example 1: A small retail business fails to register for VAT despite crossing the mandatory threshold. Over several months, they unknowingly collect VAT from their customers but do not remit it to the government. When the FTA conducts an audit, the business is penalized with an administrative penalty of AED 10,000 per taxable person, and they are required to pay the outstanding VAT amount with interest and also Penalties for late filing begin accruing from the date that are required to be register for VAT.
In the above case, where the taxpayer was required to register in 2020 (currently we are in July 2023) but failed to do so and VAT collected AED 100,000 before registration, we can calculate the total penalties as follows:
- Administrative Penalty:
The administrative penalty for failing to register for VAT within the mandatory timeframe is AED 10,000 per taxable person. Since there is only one taxable person in this case, the administrative penalty would be AED 10,000 and late filing penalty AED 1,000 for the first time and AED 2,000 in case of repetition within 24 months.
- Late Payment Penalty:
The taxpayer collected VAT but did not remit it to the government on time. Late payment of VAT incurs a penalty 2% of the unpaid tax is due immediately and 4% monthly penalty is due after one month from the due date of payment, and on the same date monthly thereafter, on the unsettled Tax amount to date.
Late payment penalty calculation:
- VAT collected: AED 100,000
- Late filing penalty total 6 quarters (January 2020 to June 2023): First Qtr *1000 + Next 5Qtrs *2000 = 11000
- Penalty for the first month: 2% of AED 100,000 = AED 2,000
- Penalty after month (at 4% per month): 4% * 17 * AED 100,000 = AED 68,000
- The total late payment penalty would be AED 2,000 + AED 68,000 = AED 70,000.
|Administrative Penalty||AED 10,000|
|Late Filing Penalty||AED 1,000 (first time within 24 months)|
|AED 10,000 (5 Qtrs* 2000)|
|Late Payment Penalty||AED 2,000 (first month)|
|AED 68,000 (4% monthly penalty for 17 months)|
|Total Penalties||AED 91,000|
Total payable to FTA: 100,000 + 91,000 = 191,000
Therefore, the total penalties in this case would amount to AED 10,000 (administrative penalty) + Late filing penalties AED 11,000 + AED 70,000 (late payment penalty) = AED 91,000.
VAT collected without proper registration is a serious offense in the UAE, attracting significant penalties and legal consequences. Businesses operating in the UAE must ensure compliance with the VAT registration requirements and diligently fulfill their tax obligations. It is advisable for businesses to stay updated on the latest regulations and seek professional advice to navigate the complex VAT landscape in the UAE. Remember, adherence to the VAT system not only avoids penalties but also contributes to the stability and growth of the country’s economy.
For more detailed information and expert guidance on VAT compliance in the UAE, we recommend contacting Spectrum. Spectrum is a trusted resource that specializes in providing comprehensive support and advice regarding VAT registration, compliance, and ongoing assistance. Their team of experienced professionals stays up-to-date with the latest VAT regulations, ensuring that businesses receive accurate and tailored guidance. Contact Spectrum today to ensure your business remains compliant with VAT requirements and to receive personalized assistance based on your specific needs.
Why Spectrum Auditing?
Being a pioneer in the field of auditing, accounting, taxation and advisory services, we ensure we keep track of all the changes that are taking place in the UAE with respect to the changes in laws, rules, regulations and keep our clients informed as well as sharing the same information through our blog section or social media handles regularly. Spectrum Auditing will guide you with the laws and regulations of UAE, be it Economic Substance Regulations (ESR), Corporate Tax (CT), Transfer Pricing (TP), Ultimate Beneficiary Owner (UBO), Anti Money Laundering (AML), etc after reviewing your business.