Posted on May 20, 2024

Are you Ready to Claim VAT refund in UAE?

VAT (Value Added Tax) was introduced as an integral part of the business ecosystem in the UAE from 1 January 2018. Apart from having one of the lowest VAT rates in the world, the UAE VAT laws can also be described as simple, business friendly and easy to navigate.  

One of the attractive propositions of UAE VAT regulations is the refund mechanism.  VAT refunds aids businesses to recover excess input VAT paid on their purchases and expenses in comparison to the VAT charged on their output.  

When the input tax claimed exceeds the output tax payable, it results in a VAT credit position for a taxpayer in the records of Federal Tax Authority (FTA). Taxpayers have the two options under this scenario (1) to carry forward the credit for set off against future VAT liabilities; or (2) to claim a refund.  

Depending upon the business dynamics, claiming VAT refunds on a period basis could be more beneficial for some taxpayers. This article delves into the considerations for claiming VAT refund in UAE.  

Ensuring Accuracy and Supporting Documentation 

The VAT refund process overseen by the FTA is designed to verify the transactional data and reliability of the information maintained by the taxpayer for VAT returns filed. While for submitting VAT returns only quantitative data is required, a VAT refund application necessitates detailed submission of transactional records for both output (standard rated, zero rated, exempt and out of scope) and input VAT related transactions, including transactions subject to reverse charge mechanism (RCM) VAT.  

Hence, before filing a VAT refund application, it is pre-requisite and prudent for a taxpayer to conduct health check of the VAT returns filed.  Any erroneous claim in the VAT return could result in reject of VAT refund, or, in extreme cases, a VAT demand being raised. Some of the common errors in VAT return filing are: 

  • VAT on personal expense considered eligible for input credit; 
  • Disregard of exempt supplies affecting input VAT claims; 
  • Errors in reporting RCM VAT on imported goods and services; 
  • VAT credit claim in absence of a valid Tax Invoice from the vendors; 
  • Incorrect classification of export supplies (0% VAT) vs. local supplies (5% VAT); 
  • Mix up between 5% and 0% supplies for taxpayers engaged in business that offers both kinds of supplies.
  • Inaccurate segregation of out of scope, exempt and zero rate supplies. While all the three categories technically have no VAT impact but are relevant for input credit determination. 

During the refund claim process, these transactions undergo detailed scrutiny. Hence, it is crucial to ensure that documentation related to supplies and purchases are maintained accurately. Apart from valid Tax Invoices, a taxpayer must maintain all the related documents like 

Export/Import declaration, Bill of Lading, contracts executed, payment evidence, etc. Taxpayers should be able demonstrate that the expenses resulting in the refund position were legitimately incurred for business purposes and in the course of providing non-exempt supplies.  

Timeline for Refunds 

Once a taxpayer submits an application for a VAT refund, the FTA initiates a process of review and assessment.  Generally, the following timeline is involved in the end-to-end process: 

  1. Filing of refund application in prescribed format: FTA has prescribed the VAT application format and claim should only be made in the said format. Refund application can be applied any time after filing the VAT return for a particular reporting period. There is no time limit to claim a VAT refund.   
  1. Processing and Review: FTA reviews the refund application within 20 business days of its submission. During this period, the FTA could request additional information or clarification on the details furnished in the refund application to assess the validity of the claim.   
  1. Extension of Deadline: If the review process exceeds the initially stipulated timeline of 20 days (about 3 weeks), FTA notifies the taxpayer about extension of the process by another 20 days (about 3 weeks).  
  1. Notification of Decision: After reviewing the application, the FTA notifies the taxpayer of its decision on acceptance or rejection of the claim. If the claim is accepted, a refund is credited in the taxpayer’s bank account next 5 business days.  

Challenges and Considerations 

While VAT refunds offer significant benefits for businesses, several challenges and considerations warrant attention before filing a VAT refund application: 

  1. Documentation Accuracy: Maintaining accurate and comprehensive documentation is crucial for substantiating VAT refund claims. Incomplete or erroneous documentation may lead to delays or rejections. 
  1. Compliance Obligations: Adherence to VAT regulations and compliance requirements is paramount. Non-compliance can result in penalties and fines. 
  1. Processing Delays: Despite the stipulated timeline for refund processing, delays may occur due to various factors, including the volume of refund applications and the complexity of business processes of a taxpayer. 

Common Mistakes to Avoid 

Some common mistakes to avoid while filing a VAT refund application are: 

  1. Inadequate Record-Keeping:  Based on the nature of business, detailed documentation is necessary to be maintained before filing the VAT refund application for substantiating the claims. If further data is requested by the FTA, the taxpayer only has 5 working days to furnish the same. If the deadline of 5 working days is not met, refund application would be rejected.  
  1. Incomplete Claim Submission: Ensure all required documents and information are included at the time of filing the refund application. Incomplete data would lead to rejection of claim.  
  1. Providing Inaccurate Information: Ensure accuracy of information submitted to prevent delays or rejections due to discrepancies. 
  1. Verifying Eligibility of Input credit: Confirm that claimed input credits resulting in VAT refund are eligible according to UAE regulations to avoid rejection or reduction of refund. If reliability on data and claims furnished is questionable, FTA may initiate verification of past records.   
  1. Overlooking Reconciliation: Regularly reconcile revenues and VAT balances in financial statements with the VAT returns filed to maintain consistency and accuracy. Mismatch of data could trigger detailed VAT audit.  
  1. Delay in updating bank details: If there is a change in the bank account of the taxpayer from the one registered under VAT, ensure that the correct bank information is updated before filing VAT refund application. Incorrect bank details in FTA records would lead to refund credit in wrong account and resultant loss for the taxpayer.   

In Conclusion 

To summaries, the outcome of a VAT refund application primarily depends upon the accuracy of the documents filed and the information furnished. If the FTA is satisfied with the representation made during the first refund application filed, the subsequent applications would face lesser scrutiny.  Based on our experience of successfully assisting various clients in their VAT refund process, our team of experts would be happy to guide and navigate your business in your VAT refund claims.  

House of Shipping: Your Financial Anchor in Tax Matters 

House of Shipping offers specialised finance and tax consultancy services designed to support shipping and logistics companies in navigating financial challenges with ease. Our experienced team provides expert guidance to help businesses streamline operations, ensure compliance, and minimise tax liabilities. Let House of Shipping be your trusted partner in managing your finances and tax obligations, ensuring smooth sailing ahead. 

Are you Ready to Claim VAT refund in UAE?

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