VAT UAE: What You Must Know About the VAT Changes

Businesses should reevaluate whether they are required to obtain VAT registration. January 1, 2023, marks a significant milestone for the UAE’s Value-Added Tax (VAT) system, as it signifies five years since its introduction and introduces the first major amendments.

VAT Changes 2023

Before January 1, 2023, business owners must carefully assess the potential consequences of the forthcoming alterations.

Businesses should reevaluate whether they are required to obtain VAT registration. January 1, 2023, marks a significant milestone for the UAE’s Value-Added Tax (VAT) system, as it signifies five years since its introduction and introduces the first major amendments.

Here are the top changes you should know about:

1. Increase Time for Tax Audits

In general, a tax audit for a monthly or quarterly tax period cannot be conducted after five years from the end of that specific tax period. However, if a taxpayer has received notification of a tax audit within the initial five-year period, the audit can still take place and be completed within the subsequent four years following the notification.

2. Tax Audits Following Voluntary Disclosures

If a Voluntary Disclosure for a monthly or quarterly tax period is submitted in the fifth year from that period, the Federal Tax Authority (FTA) will have an additional year to conduct a tax audit. This additional time allows the FTA to process the voluntary disclosure and carry out any necessary audits based on the information provided in the disclosure.

3. Tax Evasion

In cases of tax evasion, a tax audit can be conducted up to 15 years from the end of the tax period in which the evasion took place. Tax evasion is defined as the unlawful actions, whether by a registered or unregistered individual, that result in reduced tax amounts, non-payment of taxes, or obtaining an illegitimate tax refund.

4. Failure VAT registration

It’s a common misconception that avoiding VAT registration keeps businesses off the tax authorities’ radar. However, if a person fails to obtain VAT registration, the Federal Tax Authority (FTA) may initiate a tax audit within 15 years from the date they should have been registered. Therefore, businesses should reevaluate their obligation to obtain VAT registration.

5. Good News for Exporters

If a business’s entire supply is zero-rated, there is no mandatory requirement for business owners to comply with periodic VAT regulations. Such businesses have the option to request an exemption from VAT registration.

For companies that were unaware of this advantageous provision and were already VAT registered, they were obligated to continue their periodic VAT compliance. Effective from January 1, 2023, VAT-registered businesses can also apply for an exemption from VAT registration.

6. Additional requirements for input credit on service imports

Many businesses pay for services from overseas service providers based on agreements without insisting on the issuance of invoices by the service providers. The recent changes in VAT laws specify that, for the import of services, input credit can only be claimed if the taxpayer receives and retains invoices by the VAT laws.

7. Retention Payments in the Construction Industry

In a previous Tax Conversation on 05/07/2021, we discussed the time of supply for retention payments in the construction sector. If the duration between the progressive milestones of goods or services delivery and retention payment claims extends beyond 12 months, VAT may still be applicable. The one-year mark from the date when the goods or services were provided is now designated as a specific VAT supply date.

8. Supplies to Related Parties Considered

Previously, deemed supplies, such as providing goods or services to related parties free of cost, could trigger a VAT liability under existing laws. With the amended VAT laws, a company may not incur a VAT liability for providing free-of-cost goods or services to related parties if the recipient company is otherwise eligible to recover 100% input credit on its purchases.

Concluding Remarks

Tax law amendments are a global trend, reflecting the adaptability of tax laws to evolving economies and the responsiveness of tax authorities to taxpayer needs. In light of the modifications in VAT laws, it’s anticipated that corresponding adjustments to the executive regulations will follow shortly.

Business owners are encouraged to carefully assess the implications of these recent changes, as they are set to take effect on January 1, 2023.

The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.