In the UAE, businesses are expected to maintain accuracy in their VAT filings. However, errors and omissions can occur in the VAT return process, and when they do, businesses must act quickly to correct them. The UAE’s VAT law provides a framework for this through the concept of Voluntary Disclosures in VAT (VD).  

What is the Concept of Voluntary Disclosures in VAT? 

The concept behind Voluntary Disclosure is relatively simple: a taxpayer voluntarily informs the tax authorities about errors made in their tax filings, and as a result, the tax authorities are likely to reduce penalties or waive them altogether. By voluntarily disclosing errors, businesses not only fulfill their legal obligations but also demonstrate a proactive approach to compliance. 

From the tax authority’s perspective, VD is beneficial because it saves resources that would otherwise be spent on discovering the error through audits or investigations. The taxpayer, in return, faces a lesser financial penalty for stepping forward. 

Situations Where Voluntary Disclosure is Necessary 

Voluntary Disclosure in VAT is necessary in the following situations when VAT errors or omissions are identified: 

Errors Exceeding AED 10,000 in VAT Returns 
If a mistake in the VAT return leads to an error exceeding AED 10,000, it must be disclosed voluntarily. This threshold is significant as it helps the Federal Tax Authority (FTA) to focus on material errors that might affect the tax payable or refund. 

Discrepancies in Tax Refund Applications 
Any discrepancies found in submitted tax refund applications must be disclosed voluntarily. Even minor inconsistencies could lead to incorrect refunds, so it’s essential to ensure that the applications are accurate. 

Mistakes in Tax Assessments Issued by the FTA 
If the FTA issues a tax assessment that contains errors, businesses are obligated to disclose these mistakes voluntarily. This ensures that any overpaid or underpaid taxes are corrected promptly. 

Significant Errors That Cannot Be Corrected in the Current VAT Return 
In some cases, an error in a VAT return may not be correctable within the same period or return. In these instances, the business must submit a Voluntary Disclosures in VAT to rectify the issue. 

The Federal Tax Authority’s Latest Clarification on Voluntary Disclosures in VAT 

The FTA recently issued Decision No. 8 of 2024, providing more clarity on the circumstances under which Voluntary Disclosures in VAT must be filed. The decision specifically addresses common VAT filing mistakes, such as: 

• Incorrect reporting of the breakdown of standard-rated supplies per Emirate 

• Incorrect reporting of zero-rated supplies 

• Incorrect reporting of exempt supplies 

While these errors may seem less impactful because they don’t always affect the overall tax payable, the FTA still considers them significant. Even if these mistakes do not change the amount of tax due, the FTA requires them to be disclosed voluntarily. 

This raises the question: Why file the Voluntary Disclosures in VAT if the error does not affect the tax payable? 

In the UAE VAT system, the Voluntary Disclosure mechanism serves a dual purpose: 

• Traditional VD – Encourages taxpayers to correct errors that affect the tax payable. This can reduce penalties and prevent further financial impact. 

• Non-Conventional VD – Enables businesses to correct reporting errors (e.g., incorrect reporting of supplies) that do not impact the tax payable but may still need to be rectified for compliance purposes. 

Thus, Voluntary Disclosures in VAT act as the only formal mechanism to correct any VAT return errors, even those that don’t affect tax payable amounts. This policy could prompt businesses to file disclosures even for minor discrepancies, ensuring full compliance with tax laws. 

The Penalty Implications of Voluntary Disclosures in VAT 

Under Cabinet Decision No. 49 of 2021, penalties are applied based on whether the Voluntary Disclosures in VAT is filed and whether the FTA discovers the error through its own investigation: 

• When VD is filed voluntarily: Penalties range from 5% to 40% of the tax difference (the amount of the error). 

• When VD is not filed, but the FTA discovers the error: A flat 50% penalty on the tax difference, plus an additional 4% monthly penalty for every month the error remains unresolved. 

The substantial difference between the penalties for filing a VD versus not filing one illustrates why businesses are encouraged to file disclosures promptly, even for errors that may seem inconsequential. By doing so, they can minimize their financial exposure. 

The Case of Overpaying VAT: A Key Court Ruling 

In a recent case before the Federal Supreme Court, a taxpayer submitted a Voluntary Disclosure to correct an error in which VAT was mistakenly reported at 50% instead of the standard rate of 5%. The error led to an overpayment of VAT, and the taxpayer voluntarily corrected the mistake. However, the FTA imposed penalties despite the fact that the error resulted in overpayment. 

The taxpayer disputed the penalties, arguing that the mistake was a simple typographical error, not an error in the tax return, and thus should not attract penalties. 

In its ruling, the Federal Supreme Court sided with the taxpayer, stating that the voluntary disclosure was not a case of “errors in the tax return” that would warrant penalties under the provisions of Cabinet Decision No. 40 of 2017. The court noted that the correction was in the nature of an overpayment of VAT, and as such, administrative penalties should not apply. 

This case serves as an important reminder for businesses that may be facing tax disputes. It emphasizes the importance of professional legal representation when disputing tax penalties, as the outcome can significantly impact a business’s tax liabilities. 

Voluntary Disclosure as a Vital Tool for VAT Compliance 

Voluntary Disclosures in VAT is an essential mechanism for correcting VAT errors in the UAE. While it can significantly reduce penalties when errors affect tax payable, businesses should also recognize its role in correcting reporting mistakes, even those that do not alter the tax amount. Recent decisions and court rulings further clarify the nuances of this system and remind taxpayers to approach VAT compliance carefully. 

If your business has identified an error in a VAT return, it is crucial to evaluate whether a Voluntary Disclosures in VAT is necessary and beneficial. If in doubt, seek professional advice to ensure that your rights are protected, and your business remains compliant with UAE tax laws. 

At MS, our VAT specialists ensure your business remains fully compliant, guiding you through Voluntary Disclosures and minimizing potential penalties. Trust us to handle your VAT challenges with expertise and precision.