VAT Adjustments After Leaving a Tax Group in the UAE: FTA Directive No. 2 of 2026 Explained
Leaving a VAT Tax Group in the UAE does not necessarily mean that all tax matters relating to the period before exit are finished.
A company may leave a Tax Group but later recognise that an adjustment is needed in relation to a taxable supply made by them or an expense it incurred before leaving the Tax Group. This raises an important question:
On which VAT return can they report the adjustment, the former Tax Group's return or the company's own VAT return?
For the above, the Federal Tax Authority (FTA) has now issued a clarification through Directive on Tax Transactions No. 2 of 2026 on VAT on Adjustments of Output Tax and Input Tax Following a Registrant's Exit from a Tax Group.
The Directive was issued on 8 July 2026 and is effective from 1 August 2026. It provides clarity on how to handle specific VAT adjustments when a business leaves a Tax Group while remaining registered for VAT.
This article explains the new guidance and highlights what all things businesses should consider when restructuring or leaving a UAE VAT Tax Group.
What is FTA Directive No. 2 of 2026?
This Directive guides VAT adjustments relating to taxable supplies and taxable expenses that happened before a person left a VAT Tax Group, where those transactions were previously reported on the VAT returns of the Tax Group.
The key point is that the business cannot simply ignore a later adjustment, saying that the original transaction was reported already while it was part of the Tax Group.
If the business is still VAT registered after leaving the Tax Group, certain adjustments must be reflected in the business's own VAT return.
The FTA has listed this Directive under its VAT legislation, with a publication date of 10 July 2026 and an effective date of 1 August 2026.
What Happens When a Business Leaves a VAT Tax Group?
A VAT Tax Group allows eligible group members to be treated as a single taxable person for UAE VAT purposes.
During the time of Tax Group membership, intercompany transactions and VAT obligations are generally reported through the Group's VAT return.
But the situation will be more complicated when one of the members leaves.
For example:
Company X and Company Y are members of the same UAE VAT Tax Group.
Company Y leaves the Tax Group on 1 August 2026 but remains registered for VAT individually.
A transaction that involves Company Y occurred before it left the Tax Group. At that time, the transaction was reported correctly through the Tax Group's VAT return.
Later, it was found that an adjustment is required.
As per the new Directive, Company Y must adjust its own individual VAT return after leaving the Tax Group, provided other conditions are met
What Types of VAT Adjustments Are Covered?
The Directive specifically covers adjustments relating to:
1. Taxable supplies, and
2. Taxable expenses
that were previously reported in the Tax Group's VAT returns.
Two important examples are highlighted.
1. Reduction in the Value of Taxable Supplies
For example, a company made a taxable supply when it was part of a VAT Tax Group.
That particular supply was already declared in the Tax Group's VAT return.
Later, it was found that the value of that taxable supply is reduced.
This may happen due to:
- Issue of a credit note
- Reduction in price
- A commercial adjustment
- Cancellation or partial cancellation of a supply
- Any other circumstances requiring an adjustment under UAE VAT rules
If the company has already left the Tax Group but remains registered for VAT, the adjustment may need to be reported in its own individual VAT return.
This is one of the most crucial areas businesses should review before leaving the Tax Group.
2. Reduction in Taxable Expenses Where Input VAT Was Recovered
The Directive also includes situations involving taxable expenses.
Imagine a company incurred an expense while it was part of a VAT Tax Group.
The relevant input VAT was recovered through the Tax Group's VAT return.
Later, the value of that expense is reduced.
As a result, an adjustment may be required to the previously recovered input VAT..
If the company has later left the Tax Group but remains VAT registered, the company is required to make a relevant adjustment in its own VAT return, subject to UAE VAT rules.
Why Is This Important?
This clarification is very important because, while leaving the Tax Group, businesses sometimes assume that all transactions reported under the former Tax Group remain the responsibility of the Tax Group only.
That is not the case.
A business, while leaving the VAT Tax Group, should review whether there are any open transactions, credit notes, price adjustments, input VAT corrections or any other post-transaction events relating to the period during which it was a member of the Tax Group.
Failure to identify the above matters may result in:
- Wrong VAT reporting
- Underpayment or overpayment of VAT
- Incorrect recovery of input tax
- Reconciliation issues
- FTA queries
- Potential penalties or additional requirements
What Does the New Directive Require?
Requirement 1: The Business Must Have Left the Tax Group
The rule will be applicable only if the business ceases to be a member of the Tax Group but continues to be registered for VAT.
Therefore, this is particularly applicable to businesses that:
- Leave voluntarily from a Tax Group
- Are removed from a Tax Group
- Any restructuring occurred
- Change in ownership or group structure
- Become individually VAT registered
Requirement 2: The Original Transaction Must Relate to the Pre-Exit Period
The taxable supply or taxable expense must be relate to a period before the business left the Tax Group.
The original transaction should have been reported through the VAT return of Tax Group.
Requirement 3: The Adjustment Must Be Reported in the Former Member's VAT Return
Where the conditions under the Directive are satisfied, the former Tax Group member should make relevant adjustment in its own VAT return.
This results in an important compliance requirement for the business after leaves from Tax group.
Businesses Should Not Treat Tax Group Exit as a Clean Cut-Off
One of the important lessons from the Directive is that Exit from Tax froup should not be treated as the end of all VAT obligations relating to the previous period.
A proper VAT transition review should be done by the company leaving a Tax Group.
The review should take into consideration:
- Outstanding balance with customers
- Vendor balances
- Credit notes
- Debit notes
- Discounts allowed or received
- Refund calculations
- Purchase adjustments
- Input VAT corrections
- Output VAT corrections
- Contracts made before exit
- Transactions that may be adjusted after exit
This will help businesses to identify potential VAT adjustments before they end up in a compliance issue.
Documentation Is Critical
The Directive specifically requires the Registrant to maintain all supporting documents and records proving that adjustments relates to taxable supplies or taxable expenses already declared in the Tax Group's VAT returns.
This means businesses should be able to establish a clear link between:
Original transaction → Tax Group VAT return → Subsequent adjustment → Former member's VAT return
Businesses should therefore maintain sufficient documentation such as:
- Original tax invoices
- Credit notes
- Debit notes
- Contracts
- Purchase invoices
- Sales invoices
- Group tax returns
- Workings
- Accounting reports
- Documents supporting the adjustment
Clear documentation is very important if the FTA later reviews the adjustment.
Practical Example: Output VAT Adjustment
Let's take a simple example.
XYZ Trading LLC was part of a UAE VAT Tax Group.
Before exiting the Tax Group, XYZ made a taxable supply worth AED 50,000 plus 5% VAT.
The transaction was already declared in Tax Group's VAT return.
After XYZ left the Tax Group, the customer received a 5% price reduction, results a credit note.
The reduction is relates to a transaction previously reported through the Tax Group.
Under the new Directive, XYZ should consider the relevant VAT adjustment in its own VAT return, rather than assuming that it is the responsibility of former Tax Group.
The company must also maintain all supporting documents relating to the original taxable supply.
Practical Example: Input VAT Adjustment
Now consider the opposite situation.
XYZ Trading was part of a VAT Tax Group previously.
The company incurred a taxable expense of AED 200,000 plus VAT when it was part of the Tax Group.
The input VAT was claimed and recovered through the Tax Group's VAT return.
After XYZ left the Tax Group, the supplier deducted the value of the original expense and issued a credit note.
In this case XYZ should adjust the original input VAT previously recovered through the Tax Group in its own VAT return.
For this also, supporting documentation is essential.
Key Takeaways from FTA Directive No. 2 of 2026
The main points businesses should consider are:
- The Directive is comes into play when a person leaves the VAT Tax Group but remains registered for VAT.
- It covers certain adjustments relating to taxable supplies and expenses made when the person was part of the VAT tax group
- The original transactions must have been reported through the Group’s VAT returns
- The former Tax group member should make relevant adjustment in their own VAT return
- It is mandatory to maintain all supporting documents and records
- · This decision will be effective from 01st August 2026
Frequently Asked Questions (FAQs)
1. What is FTA Directive No. 2 of 2026 about?
FTA Directive No. 2 of 2026 provides clarification on how certain VAT adjustments need to be handled when a person leaves VAT Tax Group but remains registered for VAT, specifically where the original taxable supplies or expenses were reported through the Tax Group's VAT returns.
2. Does the Directive apply to a company that leaves a VAT Tax Group?
Yes. It is specifically applicable to a person who leaves a Tax Group but continues to be registered for VAT.
3. What happens if a taxable supply is reduced after leaving the Tax Group?
In this case, the company should make a relevant adjustment in its own VAT return. Where this supply has been declared in the original tax return filed by the Tax Group.
4. What happens to input VAT if an expense is reduced after leaving the Tax Group?
The subsequent reduction in the taxable expenses requires an adjustment in the former member's own VAT return.
5. What records should be retained after leaving a VAT Tax Group?
Businesses should retain supporting documents demonstrating the adjustment relates to a taxable supply or taxable expense that was previously reported in the Tax Group's VAT return. This includes invoices, credit/debit notes, agreements, VAT returns, accounting records and relevant working papers.
How Flying Colour Tax Consultant Can Help
Leaving a UAE VAT Tax Group can trigger more compliance requirements than businesses may initially expect.
At Flying Colour Tax Consultant, we help businesses with:
- Tax Group registration and amendments
- Exit from Tax Group and restructuring advisory
- Review of transition
- Historical VAT reconciliation
- Adjustments on Input and output VAT
- Preparation and filing of VAT return
- Support for FTA audit
- VAT compliance health checks
Our tax advisors can help you to assess the VAT implications while leaving a Tax Group and helps with appropriate procedures for handling post-exit adjustments. (FF*)
To learn more about VAT Adjustments After Leaving a UAE Tax Group | FTA Directive 2026, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.