Common VAT Mistakes in the UAE and How to Stay Fully Compliant

Businesses in the UAE are required to register for VAT once their taxable supplies and imports exceed AED 375,000. This is the mandatory registration threshold. However, companies earning more than AED 187,500 can also choose to register voluntarily, giving them a chance to manage VAT efficiently from the start.

Many new businesses choose to register voluntarily when their expenses cross AED 187,500, even if they haven’t yet made sales. Doing so helps them recover input VAT and ensures better compliance from the beginning.

Still, VAT filing can be challenging. Even small mistakes can lead to penalties, stress, and unnecessary costs. Understanding common VAT compliance mistakes in the UAE can help protect your business and keep your operations smooth.

Common VAT Penalties in the UAE

Below are a few examples of penalties set by the Federal Tax Authority (FTA):

• Not showing prices inclusive of VAT: AED 15,000

• Not informing the FTA about margin-based tax: AED 2,500

• Incorrect movement of goods in designated zones: AED 50,000 or 50% of unpaid tax, whichever is higher

• Failure to issue a tax invoice: AED 5,000 per missing invoice

• Failure to issue a tax credit note: AED 5,000 per note

• Wrongly issued electronic tax invoices or notes: AED 5,000 per document

Understanding VAT penalties, fines, and the UAE’s tax invoice requirements is essential for maintaining compliance.Common issues such as incorrect VAT calculations, delayed return filings, inaccurate invoicing, and input tax recovery errors occur more often than expected.Let’s explore some of the most frequent VAT compliance mistakes businesses in the UAE encounter, and how addressing them early can help you avoid penalties and stay on the right side of the FTA.

1. Missing the VAT Registration Deadline

VAT registration in the UAE is mandatory once your taxable turnover exceeds AED 375,000 within the past 12 months. Many businesses fail to monitor their turnover closely, resulting in late registrations and penalties. Failing to register on time not only attracts fines but also prevents your business from recovering input VAT for prior expenses.

Startups and small businesses with a turnover between AED 187,500 and AED 375,000 can choose to register voluntarily. Voluntary registration is particularly useful for new businesses that want to manage VAT from the beginning and claim input VAT on qualifying expenses.

Practical Tip: Track your revenue monthly, anticipate when you are nearing the threshold, and consider early registration to ensure compliance and optimize Input VAT recovery.

2. Incorrect VAT Registration or Deregistration

Another common error arises when businesses delay registration despite exceeding the threshold, or fail to deregister when their taxable turnover falls below the limit. Both scenarios can result in fines and penalties. Late registration, for instance, can incur a penalty of AED 10,000. On the other hand, if your business no longer meets the VAT criteria, deregistration must be filed within 20 business days.

Practical Tip: Regularly monitor your turnover and work with a VAT consultant to ensure timely registration or deregistration. This avoids unnecessary penalties and keeps your compliance records accurate.

3. Incorrect VAT Invoicing

VAT invoices are legal documents that must meet specific requirements, including the supplier’s TRN, customer details, VAT amount, and a clear description of goods or services, etc. Errors in invoicing can delay VAT refunds, complicate reconciliations, and lead to fines of AED 5,000 for missing or incorrect documents.

Practical Tip: Use FTA-compliant accounting software for invoice generation, audit invoices regularly, and train your finance team to ensure all invoicing requirements are consistently met.

4. Filing Late or Incorrect VAT Returns

Submitting VAT returns after the deadline or with incorrect information is one of the most common mistakes businesses make. Late or inaccurate submissions not only result in fines but can also trigger FTA audits, further complicating compliance.

Practical Tip: Keep a calendar of VAT deadlines, reconcile all transactions before submission, and always file returns on time, even in periods with no sales.

5. Claiming Incorrect VAT Refunds

Many businesses attempt to claim VAT on expenses that are not eligible, such as personal or unsupported costs. Incorrect VAT claims can lead to audits, fines, and even disallowance of prior claims.

Practical Tip: Ensure that VAT is claimed only on valid business-related expenses, maintain proper supporting documentation, and seek professional guidance when filing refund claims.

6. Failure to Maintain Proper Records

The FTA mandates that all VAT-related documents, including invoices, receipts, and ledgers, be maintained for at least nine years. Poor record-keeping not only risks penalties but also creates complications during audits.

Practical Tip: Implement organized storage of all VAT-related records, conduct internal audits quarterly, and use secure digital tools to streamline document management.

7. Neglecting the Reverse Charge Mechanism

The reverse charge mechanism (RCM) applies to imported goods and services, yet many businesses fail to account for these transactions correctly. Misreporting can result in penalties and adjustment notices.

Practical Tip: Understand when RCM applies to your business, record these transactions accurately in your VAT returns, and seek guidance from a VAT expert for complex import-heavy operations.

8. Misclassifying Taxable, Zero-Rated, and Exempt Supplies

Confusing taxable, zero-rated, and exempt supplies is a common cause of inaccurate VAT filings. Zero-rated supplies, such as exports or certain healthcare services, allow input VAT recovery. Exempt supplies, like residential rentals or life insurance, do not. Misclassifying these can result in disallowed input VAT claims and penalties.

Practical Tip: Review the UAE VAT law for each supply category, maintain separate records for zero-rated and exempt supplies, and ensure your accounting system reflects these classifications accurately.

9. Incorrect Tax Point (Time of Supply)

The “tax point” determines when VAT should be reported. Recording transactions in the wrong tax period can cause reporting mismatches and errors in returns, particularly for transactions occurring at the end of a tax quarter.

Practical Tip: Ensure that each transaction is recorded in the correct reporting period and reconcile accounts before submitting VAT returns.

10. Improper Bad Debt Adjustments

VAT cannot be claimed on unpaid invoices after six months, and unpaid supplier invoices may require input VAT adjustments. Businesses often overlook this requirement, leading to compliance issues.

Practical Tip: Regularly review accounts receivable and payable and adjust VAT claims according to Article 64 of Federal Decree-Law No. 8 of 2017.

11. Failing to Submit Voluntary Disclosures

If you discover a VAT error and fail to disclose it, penalties can increase significantly once the FTA identifies the mistake. Early voluntary disclosure can substantially reduce fines.

Practical Tip: Submit voluntary disclosure using VAT Form 211 as soon as an error is detected. Acting promptly can reduce penalties from up to 50% to as little as 5–10%.

12. Misusing Adjustment Columns

Adjustment columns in VAT returns are intended for specific corrections, such as bad debts or commercial property changes. Using these columns to amend unrelated errors may trigger FTA investigations.

Practical Tip: Use adjustment columns only for their intended purpose, and file voluntary disclosures for previous mistakes instead of altering prior returns.

13. Ignoring updates in VAT Laws & Regulations 

VAT laws and regulations are regularly updated by the FTA. Failing to stay informed can lead to non-compliance, particularly when rules on supplies, refunds, or exemptions change.

Practical Tip: Monitor FTA announcements, subscribe to reliable UAE tax newsletters, and update accounting procedures promptly.

14. Overlooking VAT Penalties

Some businesses remain unaware of the penalty structure, leading to avoidable costs. Knowing potential fines is essential for financial planning and risk mitigation.

Practical Tip: Stay informed about the FTA penalty framework and factor potential fines into your compliance planning.

15. Incorrect Treatment of Imports and Exports

Errors in documenting imports or exports can delay VAT refunds or trigger audits. Proper proof is required to zero-rate exports and claim input VAT on imports.

Practical Tip: Keep all customs and shipping documentation and ensure all transactions are accurately recorded in VAT returns.

16. Not Reconciling VAT with Financial Accounts

Discrepancies between VAT returns and financial statements can raise FTA scrutiny and lead to audits.

Practical Tip: Reconcile VAT data with accounting records before filing and conduct internal reviews quarterly.

17. Failing to Seek Professional Advice

Attempting to manage VAT compliance internally often results in errors and fines. Professional guidance can help businesses navigate complex VAT regulations efficiently.

Practical Tip: At Arzonell, we offer a free 30-minute consultation to discuss your VAT questions, review compliance gaps, and provide tailored advice that aligns with your business operations.

Tips for Confident VAT Compliance in 2025

• Use FTA-compliant accounting software to automate calculations and invoice generation.

• Conduct regular VAT audits to identify and correct errors early.

• Train your team on VAT rules and filing processes.

• Always file VAT returns even with zero transactions.

• Maintain transparent and organized documentation for FTA inspections.

Why Businesses Choose Arzonell

• Accurate Filing: Ensuring timely and correct VAT registration and returns.

• Reduced Risk: Minimizing mistakes and avoiding non-compliance penalties.

• Peace of Mind: Allowing business owners to focus on growth while experts manage VAT compliance.

• Up-to-Date Knowledge: Staying aligned with evolving UAE VAT regulations.

Reach out to us: info@arzonell.com | +971 52 191 5973