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VAT errors are bound to happen. No matter how vigilant one can be, there could be circumstances where there would be some missing tax invoices, wrong VAT calculation, invalid input VAT claims etc. Whenever as a taxable person you become aware of any such error, it is mandatory to correct the errors accordingly.

How to Correct UAE VAT Errors

There are two recourses available to correct VAT errors. Both the options are as per the guidelines issued by UAE’s Federal Tax Authority. They are:

1. Submit a Voluntary Disclosure
2. Correct the Error via VAT Return

Both the above options available depends on the quantum of the error amount.

When to Submit a Voluntary Disclosure

You MUST Submit the Voluntary Disclosure if	You May Submit the Voluntary Disclosure if
Incorrect Reporting of Tax Payable Amount & Tax Payable is underpaid by more than AED 10,000	Tax Payable is reported more in the Tax Return
Excess Tax Refund applied	Tax Refund application requested less refund than it should be

Please note that you are not required to submit a Voluntary Disclosure for the underpaid tax if the amount of the Payable Tax is not more than AED 10,000 as long as the person is able to correct the error in the Tax Return for the tax period in which the error has been discovered.

When to Correct the VAT Error via VAT Return

You can correct error via next VAT Return, where voluntary disclosure is not required. In simplicity what it means that if the due to the VAT error the tax payable amount was underpaid by less than AED 10,000 you can correct such error in the tax return of the period in which the error is identified.

How Lynchpin Can Assist you in your VAT Health Check Review

Our dedicated VAT experts can scrutinize your VAT related transaction to ensure that your accounting records in full compliance with UAE VAT Laws. We are proud to have the best VAT team in town at your disposal. Contact us today at +971-4-4370704.

To get full access to the guide issued by FTA for correcting the VAT errors, please click here

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1. Don’t claim VAT on blocked input items

UAE VAT specifically disallows to claim VAT on following items

– Clients/Suppliers entertainment expenses (e.g. annual client dinner, entertainment events for clients)

– On purchase of vehicles which are partly used for business purpose and also available for private use of employees

– Free goods to employees except where it is a legal obligation/contractual obligation in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people

2. Adjust the Zero-rated Import of Goods in Box No. 6 of VAT Return

If you have imported any goods which are not subject to the standard rate of VAT of 5% (for example goods subject to the 0% VAT rate like Pharmaceutical items), please use Box 7 of the VAT return to adjust the VAT amount accordingly, as by default all of your imports have been assumed to be subject to a 5% VAT rate. You will use minus sign while adjusting any such VAT Box 7.

3. Do Not Claim Input VAT Without a Valid Tax Invoice

Make sure you have a valid tax invoice for any input VAT claim in a tax period. For any tax invoice where the total value is over AED 10,000, the tax invoice must have your company’s full name, address and TRN. Claim VAT on such invoices would be invalid and tantamount to excess VAT claim leading to underpayment to tax payable.

4. Adhere to Place of Supply Rules While Recording VAT

Depending on the nature of the business, some of your sales may be out of the scope of UAE VAT which must not be shown in your VAT return. Examples of such sales would be if you are giving a real estate related service and the location of real estate is outside the UAE, such supply of services would be out of scope. This is due to the fact that the place of supply of real estate services is where the real estate is located and not where the supplier has its office.

5. Claiming Input VAT on Exempt Supplies

If you are such a business which supplying both taxable and exempt supplies (e.g. a building owner having both residential and commercial units in the same building), you should only claim input which is pertinent to taxable supplies. For example, if a building cleaning company charges you VAT on window cleaning of the whole building, you should apportion the input VAT and claim only the VAT on the amount charged for commercial units.

Correct filing of VAT return depends on how you are recording your VAT transaction and how well you Accounts team is well-equipped with VAT knowledge. Lynchpin Consulting assists various organizations in UAE to ensure full VAT compliance. You can always contact us to discuss your VAT compliance needs.

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According to UAE VAT laws, health insurance is subject to 5% VAT. However, claiming the input VAT on employee-related insurance expenses may not be straightforward. Where the health insurance is provided by an employer to an employee as a benefit which is part of a contract of employment or as a legal responsibility, the employer will be able to recover the input tax on such products, subject to the usual rules of VAT recovery.

Where an employer provides health insurance to the family of the employee, input tax will only be recoverable if there is a legal obligation to provide the insurance to the family members. For example in Abu Dhabi, where it is a legal responsibility to provide health insurance to family members of the employee, the company can claim the input VAT on such family insurance expenses. While in Dubai as providing family health insurance is not a legal responsibility, therefore input VAT on such family insurance expenses may not be recoverable in Dubai.

The reason for this is that Article 53 of the Executive Regulations dealing with blocked input tax envisages that costs incurred for the personal benefit of employees (which health insurance would be), will only be recoverable where:

1. It is a legal obligation to provide those services or goods to those employees under any applicable labour law in the State or Designated Zone.
2. It is a contractual obligation or documented policy to provide those services or goods to those employees in order that they may perform their role and it can be proven to be normal business practice in the course of employing those people.

It is important to understand that where family health insurance is a contractual obligation, then it must also be required in order that the employee may perform their role. It is not the case that an employee requires their family member to have health insurance in order that the employee may perform their role, and on that basis, the input tax on health insurance provided to families (unless it is a legal obligation) should not be recoverable. In contrast, where the law stipulates that the employee’s family members must be provided with health insurance, this would be dealt with under 1 above and the input tax incurred by the business would be recoverable.

If any company has claimed excess input VAT and file the return on that basis where it was not supposed to be recoverable, it will be considered as an error and must be rectified within 20 days of finding such error.

Note: To get any further advice on VAT related matters, you may contact at +971-4-4370704 or drop a line to info@LynchpinConsulting.com

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Let’s try to simplify the UAE VAT implication on oil & gas sector. The first identification we need to make is whether we are making a local supply or and export sale.

• Export sale of oil & gas products is zero-rated as per article 45(1) of UAE VAT Law.
• If you are making a local supply of oil & gas related products another distinction required is whether is crude oil/gas or non-crude oil/gas as both are subject to different VAT rates.

Different VAT Rates in UAE

There are two VAT rates applicable in UAE.

1. 5% VAT Rate (Standard Rate)
2. 0% VAT Rate (Zero-rate)

When the law specifies that any taxable item, it can be zero-rated or standard-rated.

Taxability of Local Supply of Oil & Gas

1. Local supply of non-crude oil & natural gas is subject to standard rate (5%)
2. Local supply of crude oil & natural gas is subject to zero-rate (0%) as per article 45(12) of UAE VAT Law

The responsibility of Recording VAT on Supply of Oil & Gas

After establishing that what VAT rate would be applicable on respective oil & gas supply, the next step is to identify who would be having the responsibility of recording VAT and showing in its VAT return.

As a general rule, the recipient of the supply of hydrocarbons (oil & gas) would be responsible to record VAT liability unless it is sold to an unregistered person or to a registered person who is not the reseller or who does not use the oil/gas to produce any form of energy. This would be recorded under Reverse Charge Mechanism, where the recipient records VAT liability instead of the supplier of the goods or services.

Therefore, whether the local supply of the concerned hydrocarbons is subject to zero-rate or standard-rate, if it is supplied to a registered recipient who will be reselling it or producing energy from it, the liability of recording VAT will be shifted to the recipient of the product. Due care to be taken here that even if you are buying crude-oil which is zero-rated, it needs to be recorded under reverse charge mechanism by the recipient. Although, the supplier, in this case, will not record output VAT, still, it can claim input VAT on such suppliers subject the general rules of recoverability of input VAT.

A written confirmation to be taken from the buyer who claims to be a reseller of non-crude oil/gas or an energy producer. Along with this obligation, the seller must also confirm the tax registration number of the recipient to establish that it is supplied to a registered person. Failing to do so the supplier may be held responsible for VAT obligation.

To conclude, one must take care of the nature of the oil/gas product being supplied as well as to whom it is supplied to correctly record VAT related obligations.

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• the standard rate of VAT – 5%; and
• the zero rate of VAT – 0%.

In addition, a certain category of supplies will be “exempt” from VAT.

Although VAT is not accounted for in respect of both zero-rated and exempt supplies, there is an important distinction between the two.

Zero-rated supplies

VAT is not accounted for on zero-rated supplies (since the applicable rate is 0%), but such supplies are still treated as “taxable supplies” in all other respects. As a result, the person making the supply has the right to recover the VAT incurred on their own business expenditure in the same way as they would if they made standard-rated supplies.

Zero-rated supplies

Zero-rated supplies are taxable supplies of goods or services which are subject to VAT at 0%. The following broad categories of supplies are zero-rated:

• A direct or indirect export of goods or services to outside the GCC Implementing States.
• International transport of passengers and goods which starts or ends in the UAE or passes through the UAE’s territory, including services related to such transport.
• Goods and services consumed or used during the international transportation of goods or passengers.
• Air, sea and land means of transport intended for the transportation of passengers or goods, and goods and services supplied for the purpose of the operation, repair, maintenance or conversion of these means of transport.
• Aircraft or vessels designated for rescue and assistance by air or sea.
• Certain investment precious metals.
• The first supply of a newly constructed or converted residential building within 3 years of the completion of the construction or conversion.
• The first supply of a building specifically designed to be used by charities.
• Crude oil and natural gas.
• Educational services and related goods and services for nurseries, preschool, and elementary education; and higher educational institutions owned or funded by Federal or local Government
• Preventive and basic healthcare services and related goods and services.

As mentioned above, although VAT charged on a zero-rated supply is nil, the supply is still treated as a taxable supply in all other respects – including the right of the person making the supply to recover the VAT on expenses incurred in making the zero-rated supply.

Exempt supplies

Similar to zero-rated supplies, no VAT is collected in respect of exempt supplies. However, since those supplies are not “taxable supplies”, the supplier cannot normally recover any of the VAT on expenses incurred in making exempt supplies.

Incurred VAT, therefore, will represent a cost to businesses involved in making supplies which are wholly or partly exempt from the VAT.

The following supplies are exempt from VAT:

• Financial services which are not conducted for an explicit fee, discount,
  commission, rebate or similar type of consideration, including life insurance and
  reinsurance of life insurance.
• Residential buildings, other than the residential buildings which are specifically
  zero-rated.
• Bare land.
• Local passenger transport.

Exempt supplies are not taxable supplies for VAT purposes. Therefore, VAT is not charged on exempt supplies and the supplier is prevented from recovering any VAT on expenses incurred in making those exempt supplies.

Adding VAT to goods and services

VAT is charged on the value of goods and services.

When adding VAT to the price of goods or services, the business should multiply the amount by the applicable VAT rate (e.g. 5%).

If the price already includes VAT, divide the price by 21 (for the 5% VAT rate) to find out the VAT amount. Subtracting this amount from the VAT-inclusive price, will give the VAT-exclusive value of the supply.

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