A VAT-registered person must mandatorily apply for de-registration:

a)if it stops making ‘taxable supplies’; or

b)if the value of its ‘taxable supplies’ in the previous 12 months, and the value of prescribed supplies/taxable expenses for the next 30 days, is less than Dh187,500

VAT-registered companies which have chosen to freeze their licenses or where the turnover for last 12 months was less than Dh187,500 would generally be required to mandatorily de-register for VAT. De-registration criteria for Tax Group members are separate.

Failure to apply for de-registration within 20 business days attracts a penalty of Dh10,000.

Tax Policy conundrums and impact on Designated Zone Companies

A careful analysis of the VAT Decree Law and the VAT Executive Regulations reveals an interesting dichotomy.

The Decree Law mandates that de-registration must be applied for if the ‘taxable supplies’ were less than Dh187,500. However, the Exec. Regulations provide that FTA will accept the de-registration application only if the ‘supplies referred to in Art.19 of the Decree Law’, or the taxable expenses in the previous 12 months, is less than Dh187,500.

‘Taxable supplies’ only covers standard-rated supplies and zero-rated supplies. However, ‘supplies referred to in Art.19’ is wider in scope. It covers both ‘taxable supplies’ and import of goods/services subject to reverse charge (RCM).

The supplies of goods by Designated Zone companies are generally ‘outside the scope of VAT’. If the value of the taxable supplies reported in their VAT returns of past 12 months is less than Dh187,500, such companies could be required to apply for mandatory de-registration.

A moot tax policy issue arises as submission of an application and acceptance of that application by the authorities are two distinct steps. In fact, the penalty of Dh10,000 is on the failure to submit de-registration application within the stipulated timeframe, the penalty is not on the delay in actual de-registration.

It needs to be clarified whether such companies are expected to apply for de-registration or not, if their ‘taxable supplies’ were less than Dh187,500 even if their taxable expenses or supplies including RCM is more than Dh187,500.

Will Dh10,000 penalty be imposed for failure to apply for de-registration even if the taxpayer knows that FTA would not accept the application as per the Exec. Regulations?