In 2018, the United Arab Emirates introduced VAT regulations as a response to the global movement of adopting VAT systems. These rules are updated continuously. The businesses have to stay updated with the latest changes, as they can affect how the businesses purchase VAT-applicable goods and services. New changes are added to the VAT for the goal of improving tax compliance and reducing the risk of penalties for businesses. These changes are added to the UAE VAT Decree-Law, and they can have a direct impact on the daily business operations. So the businesses in the UAE must regularly follow and comply with these new updates in VAT rules.
Value Added Tax (VAT) in the UAE
Value Added Tax (VAT) is the indirect tax charged on goods and services. It is used in many countries around the world, and it is applied to transactions where goods and services are bought and sold. As the VAT is paid by consumers when they purchase any goods or services, it is one of the common types of consumption tax. Learning about the detailed VAT rules in the UAE, you have to learn the basic concepts of VAT. Tax is the way the government collects money, and it is used for funding public services, including infrastructure development, schools, hospitals, and other essential facilities.
Recent Updates and Changes in UAE VAT Law
The UAE government has announced several amendments to the UAE VAT Decree law, which came into effect in January 2023. The changes are:
Extended Timeframe for Tax Audits
Under the new rules, the Federal Tax Authority (FTA) usually cannot start a tax audit for a month or quarter tax period after five years from the end of that tax period. If the taxpayer receives an official notice of a tax audit within these 5 years, then the audit can be carried out and can be completed within the next four years after the notification.
Tax Audits Post Voluntary Disclosures
If the taxpayer submits a Voluntary Disclosure for a monthly or quarterly tax period that is submitted in the 5th year from the end of that tax period, the Federal Tax Authority (FTA) will be given an extra year to carry out the audit. This extra time can help the FTA to properly review the voluntary disclosure and perform audits that are based on the information provided.
Tax Evasion Investigations
In cases of tax evasion, the Federal Tax Authority (FTA) can conduct a tax audit within 15 years from the end of the tax period in which the tax evasion occurred. This evasion refers to the use of illegal methods by an individual or business, whether or not registered for VAT, to reduce the amount of tax due, avoid paying tax, or claim tax refunds to which they are not entitled.
Consequences of Failing to Obtain VAT Registration
One of the common misconceptions is that avoiding VAT registration will not be detected by the tax authorities. If an individual or business is required to register for VAT, and if it is not done, then the Federal Tax Authority (FTA) can start a tax audit within 15 years from the registration date. As a result, businesses should carefully review their VAT registration, and it is very important for companies involved in zero-rated supplies, where registration errors are common and can still lead to audits and penalties if not corrected.
Favourable Provisions for 100% Exporters
Businesses that only produce the zero-rated supplies do not need to go through the regular VAT compliance, and they can apply for the exception from the VAT registration. Previously, many businesses did not know about this, and they continued to file returns and meet routine VAT requirements. This exemption is not automatic, and it should be approved by the Federal Tax Authority (FTA). So businesses that are applying for it should keep the proper records to prove that their business is fully zero-rated and no taxable local supplies are made. If your business doesnot meet these conditions, the FTA may reject your exemption and will ask you to comply with the VAT rules.
Enhanced Compliance for Input Credit on Imported Services
Many businesses utilize the services of overseas suppliers with no invoices. Under the changes in VAT law, for claiming the input VAT that is charged on the imported services, the taxpayer has to receive and keep the invoices that comply with the VAT requirements. So it is important to follow the correct invoice rules when you are dealing with foreign service providers. Also, these businesses must have the documents of validity and must keep the proper contacts, proof of payment, and supporting documents. So keeping all of these accurate records is important for supporting and claiming the input VAT during the audits of the Federal Tax Authority.
VAT Implications in the Construction Sector and Retention Payments
In the construction field, there is a change in the VAT treatment of retention payments. If the gap between delivering the goods and services stage and the claiming of the associated retention payment exceeds 12 months, then this can help to create a VAT liability. After the VAT rules are updated, the date of supply is considered as the expiration date, one year from the date the goods and services are provided. So if the retention funds are held for a long time, the construction business should track the contract terms, important dates, and schedules on retention to make sure the VAT is charged at the correct time to avoid unexpected tax liabilities.
Deemed Supplies to Related Parties and VAT Considerations
In case of the previous VAT rules, providing the goods and services for free (FOC) to related parties can create VAT liabilities as the “deemed supplies.” There are amendments which clarify that the companies may be exempted from the VAT if the provided recipient company can recover the whole input VAT on purchases. For this exemption, businesses have to show that the recipient is eligible for the 100% input VAT recovery and ensure that they are correctly recorded. So if your business is not meeting these conditions, the VAT may still apply, making it important to clearly record the intercompany agreements and maintain strong internal documentation.
Major VAT Updates from January 2026
Simplifying the Reverse Charge Mechanism
From the first of January 2026, businesses that use the reverse charge mechanism will no longer need to issue self-invoices for the imported services, and they must have the proper documentation and documents that support them to prevent incorrect VAT treatment during tax audits.
Added Time Limit for VAT Refunds and Excess Credit Claims
A five-year limit has been added for claiming the VAT refunds or excess Input Tax Credits. If the claim is not submitted within this period, the right to recover this VAT will be lost, and it can help to highlight the importance of timely reconciliation and regular reviews of the VAT records.
Alignment with Tax Procedures Law
From 2026 onward, time limits, audits, and tax assessments will be governed primarily by the UAE Tax Procedures Law instead of the separate rules under the VAT Decree-Law. This can help the Federal Tax Authority provide greater flexibility in cases of non-compliance or tax evasion.
Conclusion
As the VAT regulations are evolving continuously, the business has to regularly check and review its tax positions, internal controls, and compliance processes to make sure that they are staying updated with the latest changes. So staying proactive can help to reduce the risks, avoid penalties, and maintain smooth operations.
Enrolling in a UAE VAT course can improve your career opportunities in the Gulf countries. It can help you to gain more practical experience with the VAT for supporting the complex VAT operations. Finprov Learning offers courses designed for everyone, from students to working professionals. Our course can help you provide practical skills to secure a good job. We also provide placement support to our learners.
Our UAE VAT course includes important topics such as the fundamental principles of VAT and its operational intricacies, an overview of the VAT registration process, the impact of VAT on import and export enterprises, exploring invoicing and the documentation requisites, VAT compliance and filing duties, accounting entries, record keeping practices, and insights on potential penalties. Learning about these areas can open doors to a wide range of career opportunities, including VAT Executive, VAT Consultant, Finance Manager, and more.
FAQs
Q1. What are the latest updates on UAE VAT?
The latest updates of VAT include simplification of the reverse charge mechanism, adding a time limit for VAT Refunds and claims of the excess credit, and aligning with the Tax Procedures Law.
Q2. What are the common mistakes made in VAT?
Failing to register in the correct countries, applying the wrong tax rates, and missing deadlines are the common mistakes that can lead to financial issues.
Q3. What is the eligibility for the VAT exemption?
The VAT is exempted for individuals with chronic illnesses or disabilities, and certain small businesses with low annual turnover. Also, some specific sectors such as healthcare, education, and finance.
Q4. Do I have to pay VAT for every purchase?
Not all sales require VAT. Some of the businesses are not registered for VAT due to the low turnover, and they can only charge VAT if they choose to voluntarily register.
Q5. Is it ok to use the invoice without the VAT?
If your business is not registered for VAT, then it is fine to share invoices that don’t have the VAT number.
