Tax Conversations: Understanding VAT de-registration, an obligation or an option?

Failure to apply for de-registration within 20 business days attracts a penalty of Dh10,000

“Are you sure? We were never informed about it during our financial audits,” asked the CFO of a Jafza company, looking puzzled.

“It is indeed mandatory to apply for VAT de-registration if your taxable supplies in the last 12-months is below Dh187,500,” I reaffirmed.

“When was this requirement introduced, is it a new provision?” he asked curiously.

“No, it has been the law since the beginning,” I continued. “In fact, a penalty of Dh10,000 is applicable if you don’t submit the de-register application to FTA within 20 business days.” A silence fell amongst the 12 people in the boardroom.

“Is it applicable only for the Designated Zone companies?” the finance manager remarked.

“No, the law is equally applicable to businesses operating in the mainland. Mainland or other free zone businesses could also have an obligation, or an option, to de-register depending on their turnover.” my colleague politely replied.

We then simplified the tax jargon to discuss the de-registration scenarios by. In the current economic scenarios, it is important for business owners/managers to examine their VAT de-registration obligations to avoid penalties.

I - Obligation to De-register

A VAT-registered person must mandatorily apply for de-registration:

a)if it stops making ‘taxable supplies’; or

b)if the value of its ‘taxable supplies’ in the previous 12 months, and the value of prescribed supplies/taxable expenses for the next 30 days, is less than Dh187,500

VAT-registered companies which have chosen to freeze their licenses or where the turnover for last 12 months was less than Dh187,500 would generally be required to mandatorily de-register for VAT. De-registration criteria for Tax Group members are separate.

Failure to apply for de-registration within 20 business days attracts a penalty of Dh10,000.

Tax Policy conundrums and impact on Designated Zone Companies

A careful analysis of the VAT Decree Law and the VAT Executive Regulations reveals an interesting dichotomy.

The Decree Law mandates that de-registration must be applied for if the ‘taxable supplies’ were less than Dh187,500. However, the Exec. Regulations provide that FTA will accept the de-registration application only if the ‘supplies referred to in Art.19 of the Decree Law’, or the taxable expenses in the previous 12 months, is less than Dh187,500.

‘Taxable supplies’ only covers standard-rated supplies and zero-rated supplies. However, ‘supplies referred to in Art.19’ is wider in scope. It covers both ‘taxable supplies’ and import of goods/services subject to reverse charge (RCM).

The supplies of goods by Designated Zone companies are generally ‘outside the scope of VAT’. If the value of the taxable supplies reported in their VAT returns of past 12 months is less than Dh187,500, such companies could be required to apply for mandatory de-registration.

A moot tax policy issue arises as submission of an application and acceptance of that application by the authorities are two distinct steps. In fact, the penalty of Dh10,000 is on the failure to submit de-registration application within the stipulated timeframe, the penalty is not on the delay in actual de-registration.

It needs to be clarified whether such companies are expected to apply for de-registration or not, if their ‘taxable supplies’ were less than Dh187,500 even if their taxable expenses or supplies including RCM is more than Dh187,500.

Will Dh10,000 penalty be imposed for failure to apply for de-registration even if the taxpayer knows that FTA would not accept the application as per the Exec. Regulations?

Another Catch-22 situation

The interplay between voluntary registration and mandatory de-registration results in another practical challenge.

The VAT law allows companies to voluntarily register for VAT if its taxable expenses in the previous 12 months period exceeds Dh187,500 irrespective of the value of its turnover.

What happens if such companies do not generate enough ‘taxable supplies’ in the next 12 months but the expenses continues? Are such companies still required to apply for VAT de-registration and reapply for voluntary registration? And would Dh10,000 penalty be imposed for failure to apply for de-registration even though the application would be rejected as per the Exec. Regulations?

FTA will certainly look into the aforesaid dichotomies and issue appropriate clarifications and/or amend the law to help businesses.

II - Option to De-register

If mandatory obligation to de-register does not apply, a VAT-registered person has an option to de-register if the value of its ‘taxable supplies’ during the past 12 months was less than Dh375,000. Being optional in nature, there is no penalty for late de-registration in such cases.

The team was visibility delighted to have understood the de-registration rules. And just before we concluded the meeting, I couldn’t help but quip “By the way, have you examined the implication of Public Clarification VATP012? Let’s discuss it in our next meeting.”

Pankaj S. Jain is the managing director of AskPankaj Tax Consultants. Views expressed are his own and do not reflect the newspaper’s policy.