Case Study on Claiming Input Tax in UAE For Expenses Incurred Prior To VAT Registration.

Penalty For Delay in VAT Registration in UAE

Case Study on Claiming Input Tax in UAE

ZMG LLC, incorporated on 1st January 2019, is a trading company operating from Dubai.  As the company has taxable expenses exceeding the voluntary VAT Registration threshold of AED 187,500/ – it has voluntarily applied for VAT Registration in the UAE in August 2019. The company got registered for VAT in UAE with effect from 1st August 2019. The first tax period of the company was August to October and the first tax return become due for filing on 28th November 2020.

Here the question is that whether the company is allowed to deduct in the first tax return, the input tax in UAE paid on expenses incurred prior to the registration?

Let us first understand the term Input Tax

What is Input Tax?

Tax paid by a Person or due from him when Goods or Services are supplied to him, or when conducting an Import.

Analysis:

Let us analyze eligibility of ZMG LLC in recovering the input tax in UAE paid prior to the VAT registration.

The UAE VAT Law permits a taxable person to recover the input tax in UAE paid on goods and services purchased prior to the date of VAT registration on the first tax return submitted following the tax registration. Such recovery is permitted subject to the condition that goods and services were used to make supplies that give the right to input tax recovery upon tax registration.

In this case, the ZMG LLC can recover the input tax incurred prior to the registration in the first tax return filed on 28th November 2019.

However, ZMG LLC may not recover the input tax in UAE in the following instances:

  1. The receipt of Goods and Services for purposes other than making Taxable Supplies.
  2. Input Tax in UAE related to the part of the Capital Assets that depreciated before the date of Tax Registration.
  3. If the Services were received more than five years prior to the date of Tax Registration.
  4. Where a Person has moved the Goods to another Implementing State prior to the Tax Registration in the Stat

It is assumed that ZMG LLC incurred all the expenses for making taxable supplies before VAT registration. Therefore, ZAM LLC can recover such input tax expenses in the first VAT returns.

Applicable provisions of the Law. 

Article (56) clause (1) of the Federal Decree-Law No 8 on Input Tax Paid before Tax Registration  specifies then below that, a  Registrant may recover Recoverable Tax incurred before Tax Registration on the Tax Return submitted for the first Tax Period following Tax Registration, which has been paid for any of the following:

  1. Supply of Goods and Services made to him prior to the date of Tax Registration.
  2. Import of Goods by him prior to the date of Tax Registration. Provided that these Goods and Services were used to make supplies that give the right to Input Tax recovery upon Tax Registration.

As an exception to the provisions of Clause (1) of this Article, Input Tax may not be recovered in any of the following instances:

  1. The receipt of Goods and Services for purposes other than making Taxable Supplies.
  2. Input Tax related to the part of the Capital Assets that depreciated before the date of Tax Registration.
  3. If the Services were received more than five years prior to the date of Tax Registration.
  4. Where a Person has moved the Goods to another Implementing State prior to the Tax Registration in the State.

Delay in VAT Registration and Filing of the first VAT Return

Let us consider another scenario of Delay in VAT Registration and Filing of the first VAT Return

ABC LLC, incorporated in October 2018, is an interior designing company operating from Sharjah. The taxable supply of the company has reached AED 350,000 on 1st July 2019 and it expected a taxable supply of AED 25,000/- for the month of August 2019 based on Local purchase order received. The company had applied for registration on 25th December 2019.  The application was processed by the authority and the Tax Registration Number was issued to the company on 2nd January 2020.  The effective date of registration has been allotted as 1st September 2019 and the first tax period was from Sep to Nov 2019. Therefore, the due date for filing the first tax return was on 28th December 2019. However, since the company has been allotted the TRN on 2nd January 2020, it could file the first tax return on 3rd January only.

What all are the consequences that ABC LLC should face in the above scenario.

What is the penalty for Delay in VAT Registration in the UAE?

The Late registration penalty of for VAT in UAE is AED 20,000/-. A taxable person is mandatorily required to apply for VAT registration when the value of his taxable supply over last 12 month exceed AED 375,000/- or he expects that his taxable supply will exceed AED 375,000/- within the next 30 days. The application for registration shall be submitted to the authority within 30 days from the date on which the liability for registration has arisen.

Here, the obligation for registration arises on 1st July. Therefore, ABC LLC should have applied for registration within 30 days from 1st July 2019. However, it had submitted the application for registration on 25th December 2019 only. Therefore, ABC will be levied a late registration penalty of AED 20,000/-

What is the Late Filing fee if you do not file your VAT Return in the UAE on time?

A taxable person is required to submit for every tax period a VAT return Form 201 on or before the 28th day of the month following that tax period. If the due date for filing the VAT return is a public holiday, then the return shall be submitted on the next working day. If a registrant fails to submit the tax return on the due date, then there shall be a late filing penalty of AED 1000/- for the first instance. In case of a second failure within the next 24 months, the penalty will be AED2,000/-.

Here the first tax return of ABC LLC became due on 28th December 2019. However, as the TRN has been allotted on 2nd January 2020 only, the company could submit the first VAT return on 3rd January which is after the due date. Since the failure is for the first time, the late filing penalty would be AED 1,000/-.

What is the Late payment penalty for VAT Return Filing in the UAE?

If a taxable person fails to make the payment of due tax on the due date for payment, then there shall be a late payment penalty which shall be calculated as follows:

  • 2% of the unpaid tax is due immediately once the payment of Payable Tax is late
  • 4% is due on the seventh day following the deadline for payment, on the amount of tax which is still unpaid.
  • 1% daily penalty charged on any amount that is still unpaid one calendar month following the deadline for payment with an upper ceiling of (300%).

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