Since the introduction of Value Added Tax (VAT) in the UAE in 2018, businesses have been required to charge, collect, and file VAT at a standard rate of 5%. While VAT may seem straightforward, many companies still make errors during their VAT return filing, exposing themselves to penalties, fines, or even Federal Tax Authority (FTA) audits.
In this guide, we highlight the most frequent VAT filing mistakes in the UAE and provide practical steps to ensure your business stays compliant and penalty-free.
- Missing VAT Filing Deadlines
Many businesses forget to file their VAT return on time, often due to focusing on daily operations. VAT returns in the UAE must be filed monthly or quarterly, depending on the FTA’s assigned tax period.
Penalties for late filing:
- AED 1,000 for the first late submission.
- AED 2,000 for repeated late filings within 24 months.
Penalties for late VAT payment:
- 2% of unpaid VAT immediately.
- An additional 4% after 7 days.
- 1% daily thereafter (capped at 300%).
How to avoid it:
- Mark filing dates clearly on your business calendar.
- Use reminders and accounting software alerts.
- Appoint a registered tax agent to manage VAT filing on your behalf.
- Incorrect Input Tax Claims
VAT can only be claimed on eligible business expenses. However, many companies mistakenly claim VAT on non-recoverable items like:
- Business entertainment (meals, events).
- Personal expenses.
- Passenger vehicles used privately.
- Gifts or employee perks unrelated to taxable supplies.
How to avoid it:
- Understand FTA’s rules for recoverable vs. non-recoverable VAT.
- Retain valid tax invoices for every claim.
- Link expenses directly to taxable activities.
- Have a VAT consultant review claims before filing.
- Not Charging VAT Where Applicable
Confusion often arises between zero-rated, exempt, and standard-rated supplies:
- Zero-rated (0%) – taxable but at 0% (exports, specific education/healthcare).
- Exempt – no VAT charged and input tax not recoverable (public transport, some financial services).
- Standard-rated (5%) – VAT must be charged on most goods and services.
Failure to charge VAT correctly results in penalties and liability for the unpaid tax.
How to avoid it:
- Correctly classify each product or service.
- Use VAT-compliant accounting software.
- Stay updated with FTA VAT guidelines.
- Errors in VAT Return Forms
Mistakes in Form 201 are common — such as misreporting sales in the wrong emirate box, or forgetting to declare zero-rated/exempt supplies. Even if the tax amount is unaffected, misreporting is still penalized.
How to avoid it:
- Double-check VAT return entries before submission.
- Maintain a summary of all taxable supplies and adjustments.
- Allow an FTA-approved tax consultant to review your filing.
- Wrong VAT Calculations
Many businesses miscalculate VAT by applying it to the wrong base or confusing VAT-inclusive vs. VAT-exclusive pricing.
Example: If an item is AED 1,000 inclusive of VAT, the VAT amount is AED 47.62 — not AED 50.
How to avoid it:
- Clarify whether pricing is VAT-inclusive or exclusive.
- Use VAT-compliant invoicing tools.
- Reconcile accounts regularly.
- Not Maintaining Proper VAT Records
The FTA requires businesses to maintain VAT records for at least 5 years. These include:
- Tax invoices, credit and debit notes.
- Import/export documents.
- Ledgers and accounting books.
- Zero-rated and exempt supply records.
Penalties: AED 10,000 for the first offense, AED 50,000 for repeat violations.
How to avoid it:
- Keep both digital and hard copies of all records.
- Organize files by VAT period.
- Use cloud-based accounting systems with secure backup.
- Ignoring the Reverse Charge Mechanism (RCM)
If you import goods or services from non-UAE suppliers, you must declare and pay VAT under RCM. Many businesses overlook this requirement, leading to underreporting.
How to avoid it:
- Identify which transactions fall under RCM.
- Report both input and output VAT (they cancel out if input VAT is recoverable).
- Consult a VAT advisor if you frequently deal with foreign suppliers.
- Incorrect VAT Registration or Deregistration
Businesses must register for VAT if their taxable turnover exceeds AED 375,000 in the last 12 months. Failure to register results in a AED 10,000 penalty.
Similarly, businesses below the threshold must deregister within 20 business days, or face fines.
How to avoid it:
- Monitor turnover regularly.
- Apply for registration/deregistration promptly.
- Seek professional help for compliance with FTA rules.
- Confusing Zero-Rated and Exempt Supplies
A frequent error is treating zero-rated supplies as exempt.
- Zero-rated: Taxable at 0%, and input VAT can be claimed.
- Exempt: No VAT, and input VAT cannot be claimed.
How to avoid it:
- Train your accounting team on VAT classifications.
- Review supply types regularly.
- Confirm doubtful cases with a VAT consultant.
- Not Issuing Valid Tax Invoices
An invoice is only valid if it meets FTA’s tax invoice requirements, including:
- The phrase “Tax Invoice”.
- Supplier and customer details with TRN.
- Description of goods/services.
- VAT rate, VAT amount, and total.
Penalty: AED 2,500 per incorrect or missing invoice.
How to avoid it:
- Use FTA-approved invoicing software.
- Standardize templates across your business.
- Train staff to issue fully compliant invoices.