Avoid heavy penalties – Know when to file a Voluntary Disclosure

What is Voluntary Disclosure?

Article 1 of the UAE VAT Federal Decree Law defines that Voluntary Disclosure is “a form prepared by the Authority pursuant to which the Taxpayer notifies the Authority of any error or omission in the Tax Return, Tax Assessment or Tax Refund application in accordance with the provisions of the Tax Procedures Law”

This form must be submitted separately by the registered person through their respective EmaraTax portal, depending on the error or omission related to a specific taxable period. Similar to other applications, it will be subject to FTA review and approval, with a standard turnaround time of 20 business days, which may be extended depending on the complexity of the correction.

When Do You File a Voluntary Disclosure?

In the beginning FTA has released a Tax Procedural Guide on when Voluntary Disclosure is required to filed. Based on Article 10 of Federal Decree-Law No. 28 of 2022 (Tax Procedures Law) and Article 10 of Cabinet Decision No.74 of 2023 (Executive Regulation of Federal Decree Law of No.28 of 2022 on Tax Procedures) stipulates that:

For Underpaid Tax:

• If the error results in underpaid tax above AED 10,000, the Taxable Person must file a Voluntary Disclosure within 20 business days.

• If the error is AED 10,000 or less, the Taxable Person must correct it in the next due Tax Return (or the return of the period when the error is discovered). If no such return is available, a Voluntary Disclosure must be submitted within 20 business days.

For Overstated Refunds:

• If a refund application error leads to claiming more than entitled, a Voluntary Disclosure must be submitted within 20 business days, unless the error stems from a return or assessment (in which case, the underpaid tax rules above apply).

Errors with No Tax Difference:

• If the error or omission does not change the tax payable, the Taxpayer must still correct it or submit a Voluntary Disclosure, as directed by the Authority.

Since many registrants face uncertainty on whether a Voluntary Disclosure is required when an error has no direct impact on the total payable or refundable tax for a given period, the Authority has issued FTA Decision No. 8 of 2024, dated 1 November 2024 and effective 1 January 2025.

This Decision specifies cases where a Voluntary Disclosure must be submitted even if the total tax due remains unaffected:

1. Incorrect Emirate Reporting of Standard-Rated Supplies:

• Example: A registrant reports standard-rated supply in Box 1a (Abu Dhabi) instead of Box 1b (Dubai). Although the total tax due does not change, the reporting per Emirate is incorrect.

2. Incorrect Reporting of Zero-Rated Supplies:

• Example: A registrant initially treated supplies as out of scope but later determined they should be zero-rated. While this does not change the total VAT payable, it affects the accuracy of the total taxable supplies reported.

3. Incorrect Reporting of Exempt Supplies:

• Example: A registrant misstates the value of exempt supplies. Similar to zero-rated supplies, this does not impact the tax payable but results in incorrect reporting of total supplies.

Is there any penalty for Voluntary Disclosure?

• If a Voluntary Disclosure is submitted late, that is, after the FTA has already discovered the error or if the Voluntary Disclosure does not fully correct the identified error, the taxpayer may be subject to standard administrative penalties under UAE VAT law. These penalties vary depending on the nature and severity of the non-compliance.

• For instance, if there is an underreporting of tax, penalties can range from 5% to 50% of the underreported tax, depending on factors such as the magnitude of the error, whether similar errors have occurred previously, and whether the FTA considers the behaviour to be intentional, negligent, or due to repeated non-compliance.

• The exact penalty in each case is determined based on the type of error (for example, understated tax versus misreported supplies), the frequency of the error, and the FTA’s assessment of taxpayer intent or negligence. Timely and accurate submission of a Voluntary Disclosure generally mitigates these penalties, highlighting the importance of acting promptly and transparently when errors are discovered.

• In summary Voluntary Disclosure mechanism is implemented to allow registered persons to correct errors in their tax returns. However, its existence does not remove the responsibility of the registrant to submit accurate returns and apply the correct tax treatment. The FTA emphasizes that it is the registrant’s responsibility to correct such errors promptly upon discovery, as a demonstration of good faith and compliance with the law. Voluntary Disclosure should not be used as a justification for incorrect filing, but rather as a tool to correct genuine errors.