Since the implementation of VAT in the UAE on January 1, 2018, under Federal Decree-Law No. (8) of 2017, businesses have had to comply with a robust set of regulations issued by the Federal Tax Authority (FTA). Filing VAT returns correctly is essential to avoid administrative penalties and ensure the business remains compliant.
Despite clear guidelines, many businesses—especially SMEs and startups—commit avoidable errors during the VAT return filing process. This detailed blog outlines the most common mistakes and offers guidance on how to avoid them.
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1. Incorrect Input Tax Deductions
One of the most frequent mistakes is claiming input VAT on expenses that are not eligible. For example, businesses often claim VAT on personal expenses, entertainment costs, or non-deductible vehicle-related expenses.
Solution: Always review FTA guidelines on recoverable input VAT. Only claim input VAT that is directly related to taxable business supplies and properly documented with VAT-compliant tax invoices.
2. Using Non-Compliant Invoices
VAT returns require accurate supporting documents. Invoices that do not meet FTA requirements—such as missing TRN, incorrect VAT rate, or absence of supplier details—can lead to the rejection of input VAT claims.
Solution: Ensure all suppliers issue FTA-compliant tax invoices. Maintain a checklist of mandatory fields to validate each invoice.
3. Late Filing or Payment
The FTA imposes strict deadlines for VAT return submission and payment. Filing or paying even one day late can result in hefty penalties starting from AED 1,000 for the first offense and increasing to AED 2,000 for each repeat offense.
Solution: Use automated calendar alerts or engage a VAT consultant to handle timely filing. It’s always safer to submit early rather than risk last-minute system issues.
4. Misclassifying Supplies
Businesses often struggle to classify supplies correctly—particularly when distinguishing between zero-rated, exempt, and standard-rated supplies. Misclassification can skew VAT computations and trigger audits.
Solution: Carefully analyze each supply category. For exports, ensure documentation supports zero-rating. For exempt supplies like residential rent or certain financial services, ensure they’re excluded from output VAT.
5. Not Reconciling with Accounting Records
Many businesses prepare VAT returns without reconciling them against accounting records or bank statements. This can lead to discrepancies that may be flagged during FTA audits.
Solution: Always reconcile your sales, purchases, and VAT figures with financial statements and ledgers. Consistency is key to audit readiness.
6. Errors in Reverse Charge Mechanism (RCM) Reporting
Reverse Charge applies when purchasing services or goods from outside the UAE. Businesses often forget to report both the output and input VAT under RCM, leading to incomplete returns.
Solution: Identify and separately report RCM transactions. Your accounting software or VAT consultant should ensure correct dual entries are recorded.
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7. Incorrect Adjustment for Bad Debts
Businesses may fail to adjust for bad debts within the allowable six-month period, leading to overstated VAT liability and missed recovery opportunities.
Solution: Review receivables monthly. Apply for VAT adjustments on bad debts in accordance with FTA rules to reclaim output tax.
8. Ignoring Credit Notes and Returns
Credit notes and sales returns must be reflected in VAT returns to accurately adjust output tax. Some businesses fail to include these, which inflates tax liability.
Solution: Record all credit notes in the return period in which they are issued. Match them to original invoices for clarity and traceability.
9. Not Keeping Required Records
The FTA requires businesses to retain VAT records for a minimum of 5 years. Failing to maintain adequate documentation can result in penalties, especially during audits.
Solution: Digitally store invoices, returns, ledgers, contracts, and supporting schedules for at least 5 years. Organize files by return period and category.
10. Using Outdated or Incompatible Accounting Software
Not all accounting software is VAT-compliant or updated to reflect UAE-specific tax rules. Errors in VAT rate application, RCM entries, and report formats may arise.
Solution: Use FTA-compliant and UAE-configured accounting software. If unsure, seek advice from VAT experts.
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11. Filing Returns Without Professional Review
Many SMEs submit returns without conducting a proper internal review or validation. This leads to unintentional overstatements or understatements of VAT payable or refundable.
Solution: Always perform a final review of the return with supporting schedules. Better yet, outsource the filing to qualified tax professionals.
12. Neglecting Voluntary Disclosures for Past Errors
When businesses realize past VAT filing mistakes, they often ignore or delay correction. The FTA allows for voluntary disclosure, but it must be filed within a specific time frame.
Solution: Regularly review historical filings. If discrepancies are found, file a voluntary disclosure through the FTA portal with detailed justifications.
Conclusion
VAT return filing in the UAE demands accuracy, attention to detail, and a firm understanding of the legal framework. Small errors can attract large penalties and unnecessary scrutiny. By avoiding these common mistakes and implementing a structured compliance process, businesses can minimize tax risk and operate confidently under the VAT regime.
Need professional assistance in VAT compliance? Let PEAK Business Consultancy Services handle your VAT return preparation, filing, voluntary disclosures, and audit support. We help businesses across the UAE stay 100% compliant with VAT and corporate tax laws.
