VAT Registration Rejected: A Case Study
Disclaimer: The company names and details mentioned in this case study are fictional and have been created solely for illustrative and educational purposes. Any resemblance to real entities is purely coincidental.
In the UAE, any business or startup with taxable expenses exceeding AED 187,500 in the past 12 months can opt for voluntary VAT registration. And businesses should also have the ability to provide taxable supplies. In this case study, we will see how a company in a Free zone got the VAT registration rejected because of the lack of commercial substance.
Below are the details of the company
➤ Company Name: Horizon Insight Advisory FZ-LLC
➤ Free Zone: IFZA (International Free Zone Authority), Dubai
➤ Incorporation Date: November 2023
➤ Business Activity: Management consultancy and training
➤ VAT Registration Attempted: February 2024 (Voluntary basis)
While starting the business, the company had incorporation expenses of AED 210,000, which include (Office rent, website design, license cost) and had the intention to start the business operations in Q2 2024, while they opted for the option of voluntary VAT registration.
Main Motive
● To get the input VAT refund that was paid on incorporation expenses
● To show that the business is into offering taxable services.
● The company will start invoicing with TRN once the service contract starts.
Reference: Article 17 - registration on a Voluntary basis
According to Article 17 of Federal Decree Law No. 8 of 2017 and the clarification:
● If a person has a taxable expense that has VAT included and if it exceeds AED 187500 in the last 12 months.
● There should be an intention to have taxable supplies in the future period.
● There should be genuine business intent, not just to have expenses and no intention to do taxable supplies, as FTA can make out the genuine business.
What Went Wrong
● At the time of registration, there is no proof of an issued or received invoice, contract with suppliers or buyers.
● What FTA requested:
➞ Marketing activity proof
➞ A proof of contract
➞ Utility bills of the office and all records of staff.
● If the applicant provides taxable expense invoices which are not match the business plan, and no supporting documents are provided.
In such cases, FTA rejects the application, mentioning that the business activity doesn’t match and no proper proof is provided that shows the intention to do taxable supplies.
FTA Rationale
FTA determined that:
● The applicant was not able to establish active taxable supplies
● Alone, the cost of setting up a business is not enough
● As no approach of making taxable supplies was expected so the voluntary registration was not justified.
Business Impact
● The applicant was unable to claim input VAT of AED 10,500
● Delayed registration leads to the inability to issue VAT-compliant invoices
● Lost credibility with those clients who prefer TRN-registered suppliers
Lessons Learned
1. Intent matters as much as threshold: The FTA expects to see taxable supplies towards business not only the taxable expenses.
2. Evidence is key: You should always have all relevant documents ready before applying, like a contract, invoices or any proposal.
3 .Timing your registration: Only apply when you are expecting or about to begin the taxable supplies
4. FTA reviews holistic business substance: The FTA evaluates over all presence and the details provided.
Corrective Measures
Horizon Insight:
● After receiving 2 signed contracts, they can proceed with reapplying in June 2024
● Should prepare a detailed business plan and secure the upcoming supplies
● Once successfully registered can start issuing VAT-compliant invoices after completion.
Compliance Recommendations
● Should track all the operating expenses very carefully for the 12 months
● Should collect all proper documents that work as evidence (Proposal, invoices, contract)
● Should always get in touch with the VAT advisor and know the right way and time of registration.
● Do not assume that registration will be done automatically if we cross the expense threshold.
How Flyingcolour Tax Consultant Can Help?
We help new and growing businesses:
● We can evaluate VAT registration and eligibility also timing
● We will prepare supporting documents required for the FTA
● We can assist in submitting voluntary or mandatory registration applications
● We will navigate challenges and reapplication whenever needed.
To learn more about Case Study: Due to Lack of Business Intent Voluntary VAT Registration Got Rejected, 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.