The True Cost of Tax Non-Compliance for UAE SMEs

The word “compliance” means the same for every business, irrespective of size. However, sometimes small businesses overlook key compliance responsibilities in the early stages. Businesses, especially the SMEs, in the UAE must understand the true cost of tax non-compliance. In addition to financial penalties, there are other risks, such as reputational damage and operational disruptions. In this blog, we highlight the actual cost of non-compliance for UAE SMEs. Starting from financial penalties, we will look into other qualitative factors that can contribute to an overall business failure.

What is Tax Non-Compliance?

Tax non-compliance, in simple words, means “not following the relevant tax laws and related decisions and regulations administered by the Federal Tax Authority (FTA).” The UAE tax framework usually includes:

• Federal Decree-Law No. 47 of 2022 – for Corporate Tax
• Federal Decree-Law No. 8 of 2017 – for Value-added Tax (VAT)
• Federal Decree-Law No. 7 of 2017 – Excise Tax
• Cabinet & Ministerial Decisions, amendments, guidelines, and other relevant regulations.

True Cost of Tax Non-Compliance in the UAE

As we mentioned above, non-compliance will primarily result in financial penalties. However, it is not the end; it is actually the beginning of reputational damage and operational disruption of a business.

Financial Penalties

The UAE law is strict, and therefore, any non-adherence will most likely result in penalties. Let’s highlight some of the key penalties as per the Cabinet Decision No. 75 of 2023.

Failure to settle tax liability within the timeframe

14% (per annum) of unpaid tax is due monthly on the day following the due date and on the same day every month. For voluntary disclosure, the due date for this penalty is 20 business days from the date of submission. In a tax assessment, the due date is 20 business days from the date of receipt.

Submitting an incorrect tax return

AED 500 applies if a registrant submits an incorrect tax return.

Failure to submit the corporate tax registration application within the timeframe

A penalty of AED 10,000 applies when a taxable person fails to submit a corporate tax registration application within the stipulated timeframe. For further details on the deadline, read Corporate Tax Registration Deadlines.

Failure to maintain records and other information

An AED 10,000 penalty applies to the taxable person who fails to maintain proper records and information as per the corporate tax law and tax procedures law. A subsequent violation, within 24 months of the last violation, will result in a penalty of AED 20,000.

Failure to submit information in Arabic when requested by the Authority

AED 5,000 applies to the taxable person who fails to provide tax documents, data, and records in Arabic when requested by the Authority.

Failure to submit a deregistration application within the timeframe

AED 1,000 applies to the registrant if there is a late deregistration application as per the corporate tax law. However, the penalty increases every month by AED 1,000, up to a maximum of AED 10,000.

Failure to inform authorities about any information that requires amendment in tax records

An AED 1,000 penalty applies if the registrant fails to inform the Authority about any event that requires a change in tax records. However, a subsequent failure, within 24 months of the last violation, will result in a charge of AED 5,000.

Failure of the registrant to file a tax return within the timeframe:

AED 500 per month or part applies up to the first 12 months if the registrant fails to file a tax return within the timeframe as per corporate tax law. However, AED 1,000 per month or part applies from the 13^th month onwards.

Failure of a legal representative to file a tax return within the timeframe:

AED 500 per month or part applies up to the first 12 months if the legal representative fails to file a tax return on behalf of a taxable person within the timeframe. However, AED 1,000 per month or part applies from the 13^th month onwards. The legal representative must pay the penalty from their own pocket.

Operational Disruptions

As a growing small and medium enterprise, tax non-compliance most likely results in an operational crisis rather than just a financial crisis. Let’s highlight some of the key disruptions a business might face in the UAE.

Tax Audit Disruptions

FTA can initiate a tax audit due to non-compliance. This, in turn, can bring a lot of pressure to various departments of an entity, including the tax & accounting teams. As a result, the business might face diversion from its core functions, such as sales, business development, and planning. During a tax audit, an entity might face the following:

• Increased pressure on finance teams, which might result in a pause in routine work
• The tax authority might request prior-year documentation that can be time-consuming.
• Upon investigation, the accounting team might need to adjust accounts on an urgent basis.
• Other audit matters might require adjustments and management time.

Cash Flow Issues

An entity might face cash flow disruptions due to tax non-compliance, but how can this happen? For instance, during a tax audit, the tax authority might demand backdated corporate tax and VAT due to non-compliance in preceding years. This can result in massive tax liabilities, including applicable penalties. Thus, for an SME, it can impact the working capital negatively. As a result, a business might face difficulty in settling liabilities, mainly the short-term ones.

• Vendor payments
• Wages & Salaries
• Other operational expenses

Failing to meet the cash requirements to settle the utmost needs of an organization can ultimately raise the overall business risk. Therefore, firms must strive to remain compliant with the UAE laws in any case, irrespective of the size of the business.

Delayed Refunds – Input VAT

Non-compliance will result in increased scrutiny, and therefore, it can result in a delay in tax refunds, such as claiming input tax. For certain businesses, a timely VAT recovery is very important to keep the overall business cycle running smoothly. Therefore, firms must pay special attention to legal matters in the UAE to avoid any delays in refunds, as non-compliance might result in:

• Delay in VAT refunds
• Rejection of refunds
• Additional documentation for further scrutiny

Other Issues

There are various other matters where a business might face operational disturbances due to non-compliance. For instance, there can be issues in getting key licenses, such as renewals of trade licenses. Furthermore, there can be issues concerning the bank matters, such as renewals of bank facilities. The key here to understand is that compliance is cheap in financial as well as operational terms.

Reputational Damage

One of the core assets of a business is its reputation or goodwill. It is, in fact, a non-tangible asset and may not have a financial value for every business. However, it is still important even if it is non-quantifiable. We don’t see goodwill in every business’s balance sheet; however, it is still there, and every business strives to protect it. For most service businesses, credibility is everything; therefore, non-compliance for such firms is a serious threat to their reputation and ultimately their business. Non-adherence to juridical laws and regulations might damage:

• Suppliers’ trust
• Relationship with clients
• Investors’ confidence
• Shareholders’ value

Summary

In the UAE, it is necessary to understand the true cost of non-compliance for every business, including SMEs. First, there are financial penalties, both fixed and variable. Second, there will be a higher risk of operational disruptions. For instance, issues concerning the cash flows, audit, scrutiny, and more. Third, there will be a higher risk of reputational damage. It takes a lot of time to maintain goodwill; however, it takes a very small amount of time to lose it. Therefore, firms must keep compliance as their topmost priority, as non-compliance will increase business risk. Compliance is easy if properly guided by an expert such as CZTA.

Creative Zone Tax & Accounting (CZTA)

It is now clear that the true cost of tax non-compliance is way more than the financial cost. Therefore, it is ideal to practice compliance to avoid compounding issues. At CZTA, our team is knowledgeable and trained enough to provide assistance and guidance towards a compliant journey in the UAE. Contact us today to learn more.

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