New penalties for UAE VAT non-compliance: What do they mean for your business?
The UAE Cabinet recently confirmed several updates to the administrative penalties applicable to businesses that commit tax violations in the country.
As part of the Cabinet Decision No.49, various concessionary measures have been introduced that will reduce the severity of penalties imposed on some taxpayers. But other rules within the legislation will allow even tougher punishments to be handed to non-compliant businesses that fail to disclose mistakes.
How do the rules benefit taxpayers that submit a voluntary disclosure?
Last year, the UAE Federal Supreme Court upheld the imposition of a 300% late payment penalty on submission of voluntary disclosures. Understandably, businesses in the UAE have been concerned by the potentially enormous cost of non-compliance for some time and some had reservations about coming forward to admit to mistakes with their tax returns.
As such, many of the changes announced on 28th April have been made to incentivise such companies to voluntarily confess to errors. Measures include:
1) Late payments
Late payment penalties apply in cases where there has been late payment of taxes such as VAT or excise tax. The fine for this offence will now stand at a rate of 4% per month; previously it was a 1% daily accruing charge that quickly resulted in huge penalties.
This is how the new rules compare with the previous penalties:
|Days after tax was due||Original penalty||New penalty|
|1 day late||2%||2%|
|7 days late||4%||N/A|
|1 month late||1% daily (max. 300%)||4% monthly (max. 300%)|
In a further relaxation of the fines levied on offending businesses, when a taxpayer is required to make an extra tax payment to the Federal Tax Authority, they will now have 20 business days to do so. This compares with the immediate application of the penalty under the original rule, meaning the fine increased from the date when the tax return relating to the unpaid tax was initially due.
Under the new rules, the amount of the penalty imposed will be determined by the amount of time it takes a taxpayer to alert the Federal Tax Authority of an error by submitting a voluntary disclosure once the due date of submission of the original tax return, tax assessment or refund application has passed.
If an error is disclosed to the authority within a year the penalty will be 5% of the difference between the tax that was calculated and the tax that should have been calculated. Incremental increases will apply to a maximum of 40% for disclosures made four years after the error.
3) Relief on existing penalties
Businesses with an existing penalty to their name will benefit from relief, potentially allowing for a reduction to 30% of the original amount. For a company to secure the reduction, the VAT-registered taxpayer would need to meet certain conditions that include paying all the tax due as well as 30% of unpaid administrative penalties by 31st December 2021.
What about non-compliant businesses that do not make a voluntary disclosure?
While the punishment for non-compliance has been lessened in cases where businesses own up to a mistake, those companies that are non-compliant and fail to make a voluntary disclosure before being notified of an audit will face a tougher penalty of 50% of the amount of the error.
In addition, the business in question must pay a 4% fine for every month in which there is unpaid tax due to the FTA. This includes any overclaimed refunds and is calculated from the date payment is due for the relevant tax period to the date of receipt of the tax assessment from the FTA.
Even if a business has previously undertaken a tax healthcheck, it should consider that any subsequent tax periods could still contain acts of non-compliance and it will therefore remain at risk of the new, stricter penalties.
What does it mean for businesses?
The general trend for a reduction in penalties imposed by the UAE on non-compliant businesses has to be seen as good news. It will encourage more businesses to come forward and admit to mistakes and oversights that have resulted in non-compliance, heralding a new era of greater accuracy and compliance in tax reporting across the nation – as well as helping to generate more tax revenue for the government.
But for those unwilling to make a voluntary disclosure or, more worryingly, those that remain unaware of their non-compliance, the news should be a wake-up call. Harsher penalties are coming, meaning it is more important than ever before to get on top of tax; all the way from determination through to reporting.
It is now critical that businesses work towards identifying any errors in their data and reporting them to the FTA before they are notified of an audit.
Companies that have already been subject to penalties under the previous regulations should now consider whether they may be able to take advantage of the relief for existing penalties announced by the FTA. Providing they meet certain criteria, this would allow them to reduce the amounts of fines owed to the tax authority that are unpaid before the effective date of the new legislation.
What should you do now?
For businesses that are aware of errors within their tax returns, the first step is to make a voluntary disclosure and benefit from a reduced penalty.
If you are not aware of any existing mistakes, you should review past VAT returns immediately, identify any errors and notify the FTA of these via a voluntary disclosure.
In future, tax teams must remember it is impossible to eliminate the risk of human error if a company relies on manual processes to manage tax; be aware of the multitude of risks your data is exposed to and be prepared for mistakes and potentially an audit.
We believe the new regulations are a step in the right direction for tax in the UAE, but with change comes risk for those businesses that continue to rely on manual processes. With the gap between penalties post-voluntary disclosure and those imposed following an audit widening, you may decide it is no longer worth taking the risk of allowing people to fill and submit your tax returns.
Get in touch with us today to find out how our automated tax determination and reporting solution can guarantee your business 100% accuracy and reliability in every transaction, or how specialist tax advice and auditing services can help to protect you against the threat of non-compliance.