Most common mistakes made by SMEs on VAT filings in UAE
Businesses need to dare to invest in good resources and good accounting systems to be fully-compliant with VAT regulations.
Dubai - Non-compliance would attract fines of up to Dh50,000
It has been almost two years since the UAE levied 5 per cent value-added tax on goods and services. Since the taxation system has been introduced for the first time in the country, a number of smaller companies have been prone to making mistakes in filing their tax returns, thus attracting fines.
Tax experts say poor planning, hiring of the wrong resources, failure to issue valid tax invoice, non-maintenance of records and mistakes in simply calculating and paying VAT but failing to file the appropriate amounts are some of the most common mistakes made by the small and medium companies in the UAE when filing tax returns. As a result, these mistakes can attract fines as high as Dh50,000.
Thomas Vanhee, founding partner at Aurifer Tax Middle East, said failure to plan, hiring of wrong resources, not having the right accounting set-up and limited understanding of the concept of exempt, zero-rated and outside of scope supply are the most common mistakes committed by SMEs in the UAE.
"Similarly, a lot of mistakes have been observed related to the input tax deduction due to the misinterpretation of the VAT legislation. The VAT legislation only allows to reclaim input VAT paid to suppliers on goods and services that have been used to make taxable sales," he said.
"Common mistakes include deduction of input VAT on non-compliant invoices, incorrectly performing the calculations for partial deduction, incorrect deduction of input VAT for blocked items or linked to exempt supplies, incorrect recovery input VAT on capital assets and the deduction of import VAT paid on behalf of other businesses."
Nimish Goel, partner at WTS Dhruva Consultants Middle East, said non-filing or late filing of the periodic VAT returns; failure to issue valid tax invoice and VAT credit notes; non-maintenance of records and documents as per the requirements of the UAE VAT law; delay in amending the VAT registration on account of addition in branches; and recovery of input tax pertaining to blocked expenses (such as entertainment expenses, expenses incurred in a personal capacity, medical insurance, etc) are the most common mistakes occurred by small entities.
He said fines for non-registration or late registration is Dh20,000, while failure to issue valid tax invoice/credit motes is Dh5,000 per document. Non-maintenance of records and documents per requirements is Dh10,000 for the first time and Dh50,000 in case of repetition.
Goel suggested that companies should take a thorough review of compliances undertaken and positions adopted for the last 18 months, create a VAT governance framework with proper roles and responsibilities defined for the team members, appoint tax experts for periodic review of tax positions and VAT returns, upgrade IT setup to meet the record-keeping requirement and train to the users.
Vanhee suggested that investing in right people and technology in the solution.
"Businesses need to dare to invest in good resources and good accounting systems. Being compliant requires a constant follow-up of matters and dedicated staff. It is not enough to add tasks to the current tasks of finance managers or controllers. A more holistic approach is required. Although an accountant may have good operational knowledge, he might come short in the legal analysis," he said.
"The fines are simply too important to get it wrong. We see many businesses surprised when they finally do end up getting advice, make a voluntary disclosure and end up being heavily penalised. it would be prudent for SMEs implementing the tax to follow best practices, train staff about VAT, change their core processes and adapt the accounting systems to achieve a reasonable degree of tax compliance," he suggested.