20 Common VAT Misconceptions in the UAE – Explained by Experts
VAT was introduced in the UAE back in 2018, and since then it has become a key part of country’s tax system, but unfortunately even after several years, many businesses are still not clear about how it really works. Many businesses don’t understand which transactions are taxable, zero-rated, or exempt. With tax audits becoming more common and penalties getting stricter, it’s more important than ever for UAE businesses to understand VAT correctly. This confusion is especially common among startups and small companies that are still new to the VAT process.
At Vertix Auditing, we have come across many misconceptions during our VAT reviews and audits with a wide range of clients. These misunderstandings can easily lead to mistakes, penalties, and even hurt your business reputation. To learn in more detail about these myths, refer to our guide below, which is carefully crafted by Vertix’s professional tax team.
1: VAT Is a Tax on Businesses
Some businesses think avoiding Value Added Tax helps them earn more, but that is not true. The job of companies is just to collect VAT on behalf of Federal Tax Authority (FTA) and then reimburse it back to the FTA. They simply charge VAT on their sales and finally pass the amount to the FTA.
Example: ABC gym charges AED 500 per membership. It adds 5% VAT (AED 25), so the total amount charged to customer is AED 525. The customer pays AED 525, business keeps AED 500 and reimburse AED 25 back to FTA.
2: Only Large Companies Need to Register for VAT
VAT registration in UAE is not dependent on the size of company. If your annual taxable supplies exceed AED 375,000, then VAT registration is mandatory for you. Even small or one-person businesses can reach this limit pretty quickly, especially in fields like consulting, design, or online selling.
Businesses can also consider Voluntary VAT Registration if their taxable supplies are above AED 187,500 but below AED 375,000. This allows them to claim back VAT on their costs and build trust with clients.
Example: A small consultancy company makes around AED 400,000 a year, that is more than the mandatory registration threshold, so in this type of situation the VAT registration becomes mandatory. But even a smaller business earning AED 200,000 can choose to register voluntarily, mainly to recover the VAT it pays on expenses like rent or general business purchases.
3: Voluntary Registration is Not Useful
Voluntary VAT registration is a great option for particularly startups and growing businesses. This helps a company to get back the input VAT that it has paid on business purchases and any other expenses, even if the turnover has not yet reached the threshold for mandatory VAT registration of AED 375,000. Moreover, recovering VAT helps to reduce costs and improves cash flow of your business. Similarly, it also helps you understand the VAT process early and in a better way, so you are prepared when registration becomes mandatory.
Example: A new interior design company spends AED 210,000 on purchase of materials. If the company has voluntarily registered for VAT, it can claim back AED 10,000 as input VAT.
4: Exports are VAT-Exempt
The exports are considered zero-rated, not exempt from VAT. That means you don’t have to charge VAT on export of goods or services, but you can still claim back the VAT which you have paid on business expenses.
Example: A firm located in Dubai sells products to a buyer who is from England. It doesn’t charge VAT on the invoice issued to this overseas customer. But the company is allowed to claim the VAT that it has paid on the relevant expenses such as packaging, materials, or freight services.
5: You Can’t Cancel VAT Registration
You must apply for VAT Deregistration if your taxable supplies in the last 12 months and the projected revenue in the next 1 month is less than AED 187,500, or your business has been liquidated or closed.
Example: If a seasonal tourism company shuts down or its sales drop below AED 187,500, it must apply to deregister its company for VAT.
6: Freelancers Don’t Need VAT Registration
According to UAE VAT law, freelancers as well as self-employed professionals are treated as businesses. If their annual income generated from services surpasses AED 375,000, it becomes mandatory for them to register for VAT and charge 5% on their invoices.
Example: A freelance graphic designer who is earning AED 400,000 per year, it is compulsory for him to register for VAT and include 5% VAT on his invoices to clients.
7: Residential Property Sales are Always Subject to VAT
Not all residential properties are taxed in the same way. The first sale of a new residential property within three years of completion is zero-rated, meaning 0% VAT applies. However, the sale or rental of an existing (used) residential property is exempt from VAT, no VAT is charged, and no input VAT can be claimed.
Example: Selling a brand-new apartment for the first time is charged at 0% VAT. Thereafter, when the same apartment is sold again or rented, it is considered VAT exempt.
8: Commercial Property is VAT-Exempt
The sale or rent of commercial property is always charged with 5% VAT.
Example: Company A rents out its commercial office space to Company B. Company A will charge 5% VAT to company B on the rental amount.
9: VAT Doesn’t Apply to Free Zone Companies
Being in a free zone does not mean your company is VAT-free. There are designated zones and non-designated zones that determine the applicability of VAT.
Designated Zones: There are only a few free zones that fall under the category of Designated Zones. Companies registered in Designated Zones enjoy VAT-free status in most types of the transactions, but not all. No VAT is applicable for goods supplied within the same designated zone or between two designated zones. But if any goods are supplied to mainland from any designated zone, you must apply 5% VAT on your sales invoice. Services are always subject of 5% VAT whether the transaction takes place within designated zones or non-designated zones.
Non-designated Free Zones: Most of the free zones fall under this category. Companies registered in Non-designated free zones are considered similar to Mainland companies and must apply 5% VAT on all their sales transactions (Goods as well as services) within and outside the free zone.
Example: Company A sells goods to Company B within the same Designated Zone. Company A will not charge VAT to company B. But if Company A provides services to Company B, it will charge 5% VAT on services.
10: VAT is Not Applicable to E-commerce or Online Sales
VAT is applicable for online as well as physical sales in the UAE. The rule is that any person selling products or providing services to customers in the UAE must add 5% VAT to the final price of the product or service. But if you sell to customers outside the UAE, those sales are treated as exports and charged at 0% VAT. You also get to claim back the VAT you pay on your business expenses.
Example: If a UAE online store sells clothes to customers within the country, it must add 5% VAT. But if it sells to someone in the UK, no VAT is added (0% VAT).
11: Healthcare Services are VAT-Exempt
It is a misconception that all medical services are free from VAT. Treatments that help in cure or prevent illness are considered 0% VAT, but beauty or cosmetic treatments are charged 5% VAT.
Example: A visit to the doctor for flu treatment incurs 0% VAT, but if you are going to have a cosmetic procedure like teeth whitening, then you will be charged 5% VAT.
12: Educational Institutes Are Fully VAT-Free
Schools, universities, and nurseries approved by UAE government are charged at 0% VAT. But training centers or courses that do not have official approval must charge 5% VAT. For better understanding, schools that follow the UAE curriculum don’t charge VAT, while private coaching or language centers must add 5% VAT because they are not officially approved.
13: VAT on Entertainment or Staff Meals Can Be Recovered
VAT paid on entertainment, leisure, or personal expenses cannot be claimed as input VAT. The FTA considers these as non-business expenses.
Example: If a company pays for a staff party or team lunch, it cannot recover the VAT on those expenses. But VAT paid on office supplies or business travel can be claimed.
14: VAT Filing Can Be Done Once a Year
In UAE, VAT returns are usually filed every three months (quarterly). However, some large businesses may be required to file monthly depending on their size and activity. It is not the business who decides when to file for its VAT return, it is the FTA who decides the VAT return filing period.
15: Input VAT Can Always Be Claimed
Many businesses believe that every VAT amount which they had paid on expenses can be claimed as input VAT, but that’s not true. The UAE VAT Law only allows recovery of VAT that is directly related to taxable business activities. Personal or non-business expenses cannot be claimed, for example, staff birthday party, gifts or family meals.
16: You Can Delay Paying VAT If Clients Did Not Pay You
This is a common misconception that you do not need to pay VAT unless your customer pays you. Generally, the tax point for a business transaction is earlier of issuance of invoice, receipt of payment, or delivery of service. This means whenever your tax point is reached, you are liable for the relevant output VAT. Even if a client delays your payment, you still need to pay the VAT to FTA on time to avoid administrative fines.
Example: Company A issues invoice to company B on 1st January 2026. Company B paid that invoice on 30th April 2026. The VAT return filing period of Company A is Jan to Mar 2026. Since the tax point has reached (issuance of invoice on 1st January 2026), Company A must report this sales invoice in its Jan to Mar 2026 VAT return and pay the associated VAT to FTA.
17: Once VAT is Filed, it Can’t Be Corrected
If you made an error in your VAT filing and found that error after the filing, you can still correct it by filing a Voluntary Disclosure (VD). A VD can be filed through the FTA portal within 20 business days from the date you became aware about that error. If the error is less that AED 10,000, you can adjust it in the next VAT return, but if the error is above AED 10,000, you must file a VD.
Example: If you accidentally reported AED 90,000 in sales instead of AED 900,000, you can correct it by submitting a voluntary disclosure. Voluntary disclosure is subject to administrative penalties.
18: VAT Doesn’t Impact Cash Flow
VAT can impact the cash flow of your business because it is necessary to pay the net VAT to FTA before the deadline for payment, even if your customers haven’t paid you yet. So, it depends on how you manage your financial resources. To simply avoid cash shortages, you must track invoices and efficiently plan your VAT payments in advance. Managing your supplier payments and debtor collections carefully is important to avoid cash flow issues.
19: VAT Penalties Are Minor
VAT penalties are not minor in the UAE and can cost you a lot. There are various ways in which you can be fined by FTA. For example, if you registered late for VAT, you can face a fine of AED 10,000. Similarly, if you did not de-register on time, you will be fined with AED 10,000. There are many other penalties that FTA can impose on your business e.g. late VAT filing, incorrect VAT return, not keeping the required bookkeeping records, inaccurate tax invoice formats, etc.
20: If You Are Not Registered, You Don’t Need to Maintain VAT Records
It is important and necessary for every business to maintain proper bookkeeping of accounts for possible future review by FTA, whether you are registered for UAE VAT or not. Maintaining proper accounting records are also necessary to comply with the requirements of Article 27 and 54 of Federal Decree Law No. 32 of 2021.
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