VAT Registration vs. VAT Deregistration: When and Why You Need It
Blog / By Master Consultant
VAT registration and deregistration are crucial aspects of VAT Compliance in the UAE. Businesses must understand when they are required to register for VAT and when it is appropriate to apply for VAT deregistration. Failing to meet VAT registration or deregistration requirements can lead to penalties, fines, and legal issues. This blog will clarify the circumstances under which businesses need to register for VAT and when they should apply for deregistration, helping you stay within legal limits and avoid unnecessary costs.
What is VAT Registration and Why Is It Important?
VAT registration is the process through which businesses formally register with the Federal Tax Authority (FTA) to collect VAT on their taxable sales. Once a business is registered for VAT, it must charge VAT on its sales, pay VAT on its purchases, file VAT returns, and maintain accurate VAT records.When Is VAT Registration Required?
Businesses are required to register for VAT in the UAE if they meet certain conditions. These include:1. Exceeding the VAT Registration Threshold:
A business must register for VAT if its taxable supplies (sales of goods and services subject to VAT) and imports exceed AED 375,000 annually. This threshold applies to the total taxable turnover of a business, which includes both domestic and international sales of VAT-able goods and services.2. Voluntary VAT Registration:
Businesses that do not meet the AED 375,000 threshold but still have taxable supplies exceeding AED 187,500 annually can choose to voluntarily register for VAT. Voluntary registration is often beneficial for businesses that want to reclaim VAT on purchases or appear more credible to clients.New Businesses:
New businesses should assess their projected taxable turnover. If they anticipate exceeding the AED 375,000 threshold within the first 30 days of their business operations, they are required to apply for VAT registration. If their turnover is expected to be between AED 187,500 and AED 375,000, they can opt for voluntary registration.Consequences of Failing to Register for VAT
- Businesses that fail to register for VAT when required may face penalties, including fines and back taxes owed to the FTA. It's essential for businesses to monitor their taxable turnover and register promptly once they exceed the VAT registration threshold.
VAT Deregistration: What is it and When Should You Apply?
VAT deregistration is the process of formally cancelling a business’s VAT registration with the FTA. Deregistration may be necessary when a business no longer meets the criteria for VAT registration, or when the business no longer wants to be VAT-registered.When Is VAT deregistration Required?
VAT deregistration is required under the following circumstances:1.Exceeding the Deregistration Threshold:
If a business’s taxable supplies and imports fall below AED 187,500 annually for a continuous period of the last 12 months, it may apply for VAT deregistration. In this case, the business no longer needs to charge VAT on its sales or file VAT returns.2. Business Closure or Sale:
If a business is closing down or transferring its operations to another entity, VAT deregistration is required. This ensures that the business is no longer responsible for VAT obligations, including filing returns and paying VAT.3. Voluntary Deregistration:
If a business is voluntarily closing or deciding not to operate under VAT anymore (for reasons such as having limited taxable supplies), it may apply for voluntary deregistration if its taxable supplies are below the AED 187,500 threshold.4 Business Restructuring:
If a business undergoes restructuring and becomes a part of a larger group or a different corporate entity, it may be required to deregister for VAT under its old structure and apply for VAT registration under the new entity.Consequences of Failing to Deregister
- If a business that is no longer required to be VAT-registered fails to deregister, it could continue incurring VAT obligations, which may result in penalties. Deregistration ensures that the business is no longer liable for VAT filing and payments when it is not required to do so.
The VAT Registration and Deregistration Process: A Step-by-Step Guide
VAT Registration Process
1. Determine Eligibility:
Check if your business meets the VAT registration threshold of AED 375,000 in taxable supplies or if you are eligible for voluntary registration.2. Prepare Documentation:
Collect the necessary documentation, including details of your business, estimated turnover, and information about taxable supplies and imports.3. Submit the Application:
Submit your VAT registration application through the FTA’s online portal. The process will require you to provide business information, financial projections, and details on taxable activities.4. Receive VAT Registration Number:
Once your application is approved, you will receive your VAT registration number. This number must be displayed on invoices and used for all VAT-related transactions.5. Begin VAT Compliance:
After registering, you must start collecting VAT on taxable sales, submitting VAT returns, and maintaining VAT records.VAT Deregistration Process
1. Eligibility Check:
Ensure that your business’s taxable supplies have fallen below the AED 187,500 threshold or that you are closing your business. This qualifies you to apply for VAT deregistration.2.Prepare Documentation:
Gather the necessary documents, such as proof of business closure, final VAT returns, or details of business restructuring.3. Submit Deregistration Application:
Submit the VAT deregistration request through the FTA portal. The FTA will review your application and ensure that all VAT obligations are settled before approving deregistration.4. Complete Final VAT Return:
Submit your final VAT return, ensuring all VAT liabilities are paid and there are no outstanding obligations. This is critical for the FTA to close your VAT account.5. Confirmation of Deregistration:
Once the FTA approves your deregistration, you will receive a confirmation that your VAT registration has been canceled.When Should You Consider VAT deregistration?
While VAT deregistration may seem like a simple process, businesses should carefully consider when to apply for deregistration. Here are some factors to consider before opting for VAT deregistration:- Decline in Taxable Sales: If your business’s taxable supplies consistently fall below the AED 187,500 threshold, deregistration may reduce unnecessary administrative efforts related to VAT Compliance.
- Closing or Selling Your Business: If you are planning to close your business or sell it, deregistration is necessary to ensure you are not liable for VAT after the business ceases operations.
- Business Restructuring: When restructuring your business, you may need to deregister the old entity and apply for VAT registration under the new business structure.
How VAT Registration and Deregistration Affect Your Business
Implications of VAT Registration
- Pricing Changes: VAT registration requires you to charge VAT on taxable supplies. Businesses must adjust their pricing strategies accordingly, either including VAT in the sale price or adding it separately.
- Cash Flow Management: VAT registration may affect your cash flow, as businesses will need to account for VAT on both sales and purchases, and handle VAT refunds where applicable.
Implications of VAT deregistration
- No More VAT Collection: Once deregistered, your business will no longer collect VAT on taxable sales or need to submit VAT returns. This simplifies accounting and reduces administrative burdens.
- Clearing VAT Obligations: Businesses must ensure all VAT liabilities are cleared before applying for deregistration. This includes submitting final returns and paying any outstanding VAT amounts.