An entity while preparing its VAT Return for the fourth quarter “Oct – Dec” realized that it has missed paying AED 4000 VAT tax per quarter for last three quarters from January till September under Reverse Charge Mechanism. In UAE, Reverse Charge Mechanism (Article 48) is applicable in case of import of goods or services into UAE. The Reverse Charge moves the responsibility of reporting a VAT transaction from seller to the buyer (recipient) of good or service - the recipient reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return for the same quarter. These two declarations finally offset each other from payment point of view.
Question is does the law permit this registered entity to pay the missed tax for all the previous quarters now along with the current VAT Return?
UAE VAT Law (VAT Return User Guide Page 8) permits submission of missed out tax for previous period in case the tax error amount does not exceed AED 10,000. In this case, output tax (Article 61) for the previous three quarters can be filed in the current VAT return as the payable tax amount of AED 4000 is less than permissible AED 10000 for each quarter.
However, to claim input tax credit (Article 55), the decree law says that tax invoice with the recipient should not be later than two months old. Tax periods run for three months and return for a quarter is submitted within 28 days of the end of that quarter.
Given these facts,the entity in question can explore three following options:
1. No VD - Since the tax amount of AED 4000 per quarter is less than permissible limit of AED 10000, the client can file its return and rectify its error using this assumption ( error amount is less than 10k) and make entries for both input and output tax for all missed quarters. In this way the two entries cancel each other from a cash payment perspective in the same return.
2. Make VD - for both entries for all quarters and then proceed as per FTA instructions.
3. Make VD for input tax and file output tax. This is because this entity will need the import VAT document to show that import VAT has been paid to claim the input VAT but at the same time since its tax invoice will be more than 60 days old, it will not be able to recover it. So VD makes sense.
However, it can proceed with rectifying output tax error on the assumption than tax amount is less than AED 10000.
What do you think is this entity should do?
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