Correcting VAT errors in the UAE

Errors in VAT reporting may be more common than perceived. A typical scenario may occur when a supply is initially reported as zero-rated but should have been subject to standard-rate VAT (5%), e.g. exports of goods or services initially treated as zero-rated that ultimately do not meet the requirements to qualify as such.

We outline how such an error should be rectified under UAE tax legislation, particularly when the omitted VAT exceeds AED 10,000.

The legal framework and corrective measures

Under UAE tax legislation, the key provisions governing the correction of VAT errors are set out in:

Federal Decree-Law No. 8 of 2017 on Value Added Tax (“VAT Law”)
Cabinet Decision No. 36 of 2017 on the Executive Regulation of the Federal Decree-Law No. 7 of 2017 on Tax Procedures (“Tax Procedures Executive Regulation”)

Relevant VAT Law provisions:

Article 61.1(e) – allows a registrant to adjust output VAT if “the tax was charged or tax treatment was applied in error”.
Article 62.1 – provides that if the output tax due for a supply exceeds the output tax calculated by the registrant, the registrant shall issue a new tax invoice for the additional amount and calculate the additional tax for the tax period during which the error was identified.
Articles 62.2 and 63 – if the output tax calculated by the registrant exceeds the output tax which should have been charged, the registrant shall issue a tax credit note and reduce the output tax accordingly.

Relevant Tax Procedures Executive Regulation provisions:

Article 10.1(a) – requires that where the amount of the error or omission in a tax return results in a difference in the payable tax of more than AED 10,000, the taxable person shall submit a voluntary disclosure to the FTA.

Practical steps to correct VAT errors

Issuing corrective documents

Tax credit note – to cancel the original zero-rated invoice.
New tax invoice – applying the correct 5% VAT.

These documents must always be issued, regardless of the VAT amount, to provide an accurate audit trail and comply with Articles 61 and 62 of the VAT Law.

Reporting the correction and understanding the tension

Here arises a tension between the VAT Law and the Tax Procedures Executive Regulation:

Article 62.1 of the VAT Law seems to indicate that the adjustment from the new tax invoice should be reflected in the tax period during which the error was identified, without penalties. However,
the Tax Procedures Regulations require a voluntary disclosure to report the correction in the period of the original error if the omitted VAT exceeds AED 10,000, which automatically triggers penalties.

Normally, the hierarchy of laws would suggest that the special law (the VAT Law) prevails over the general procedural regulations. This would imply that where a transaction has been incorrectly classified as zero-rated, and the tax invoice has been issued and reported in the corresponding VAT return, the output VAT adjustment could be made in the tax period in which the error is discovered—without the need for a voluntary disclosure.

This does not render Article 10 of the Tax Procedures Executive Regulations meaningless. The voluntary disclosure requirement still applies to many other situations:

omitted transactions not reported at all,
VAT charged but not included in the return,
arithmetic or reporting errors,
over-reported input VAT, and more.

However, in practice, the Federal Tax Authority (FTA) has given preference to the procedural framework. Through private clarifications, it has stated that output VAT corrections where a transaction was initially classified as zero-rated, but should have been subject to 5%, must be reflected in a voluntary disclosure for the original period, even if the tax credit note and new tax invoice are issued later.

This contrasts with other scenarios under Article 61.1 of the VAT Law, such as subsequent changes in the nature of the supply or increases in consideration. In those cases, Article 62.1 applies fully, and the correction is reported in the VAT return for the period in which the new tax documents are issued—not via voluntary disclosure.

Practical implications

Businesses should anticipate temporary discrepancies between the VAT return for the period of the voluntary disclosure and their sales and purchase ledgers.

The tax credit note and new tax invoice will appear in the ledgers of the period in which they are issued, not the period of the original error.
The VAT return for the later period will not reflect these documents.
Reconciliation is essential to ensure accuracy during an FTA audit.

Key takeaways

For transactions initially reported as zero-rated but that should have been subject to 5% VAT:

Corrective documents must always be issued — including a tax credit note and a new tax invoice — to ensure an accurate audit trail.
If the omitted VAT exceeds AED 10,000, the correction must be reflected in a voluntary disclosure for the original tax period, in line with FTA practice, despite the wording of Article 62.1.
Businesses should reconcile discrepancies between accounting ledgers and VAT returns to maintain accurate reporting and audit readiness.

Navigating VAT compliance in the UAE can be complex, particularly when correcting errors with significant implications. With the experience and insights of our team at KPMG, we help clients approach these challenges confidently — ensuring accuracy, compliance, and practical solutions tailored to their business needs.