Corporate Tax & VAT
UAE VAT Penalties and Deregistration
KIJBy Kashif I Jillani · Founder & Company-Formation Advisor, Oxford Management Consultancy
Ask most business owners what a VAT penalty looks like and they picture an audit, a dispute, or an assessment for tax they should have paid.
That is not what the FTA collects most of. The penalties that actually land are administrative, for being late, for forgetting, or for a company that stopped trading two years ago and that nobody ever deregistered. They accrue quietly, they accrue monthly, and they hit businesses that owed no VAT at all.
Here is the full schedule, and the one deadline almost nobody knows.
The penalty schedule
Under Cabinet Decision No. 49 of 2021, which restructured the administrative penalties:
| What you did | What it costs |
|---|---|
| Registered for VAT late | AED 10,000 |
| Failed to deregister on time | AED 1,000 per month, capped at AED 10,000 |
| Filed a return late | AED 1,000 first time; AED 2,000 if repeated within 24 months |
| Paid late | 2% of the unpaid tax immediately, then 4% monthly from one month after the due date, capped at 300% of the tax |
| Filed an incorrect return | AED 1,000 first time; AED 2,000 if repeated |
| Failed to keep the required records | AED 10,000 first time; AED 20,000 if repeated |
Notice what is missing from that table: profit, turnover, or size. These are flat penalties. A dormant company with no revenue pays the same AED 1,000 for a late return as a company turning over AED 50m. In proportional terms, the penalty regime falls hardest on the smallest businesses, which are precisely the ones least likely to have someone watching the calendar.
The deadline nobody knows: 20 business days
This is the one that catches people.
If you become eligible to deregister from VAT, you have 20 business days to apply. Not 20 days, but 20 business days. Miss it and the penalty starts running at AED 1,000 per month, up to AED 10,000.
You become eligible when either:
- You stop making taxable supplies, meaning you closed, you sold, you went dormant, or you pivoted to exempt activity; or
- Your taxable supplies over the previous 12 months fall below AED 187,500, which is the voluntary registration threshold.
Read that second one carefully, because it is a trap. A business whose revenue fell, perhaps due to a bad year, a lost client, or a wind-down, has a compliance obligation created by having less money. The businesses most likely to trip this are the least able to absorb AED 10,000 for tripping it.
The dormant company problem
The most common version of this we see:
A company was set up, registered for VAT, traded for a while, and then stopped. The owner moved on. Nobody cancelled the licence, nobody deregistered, and nobody filed anything, because there was nothing to file.
Except there was. Registration obliges you to file, whether or not you traded. A VAT-registered company with no activity must still submit a nil return every period. Each missed one is AED 1,000, then AED 2,000. On top of that, the failure to deregister is AED 1,000 a month.
A company that earned nothing for two years can comfortably owe five figures. We have cleaned up several of these, and the owner is always genuinely astonished, and always right to be, because nothing about it feels like it should be true. It is true anyway.
The order matters: deregister VAT before you close the licence
If you are shutting a company down, the sequence is not optional and it is not intuitive.
File every outstanding return first
Including the nil ones. You cannot deregister cleanly with returns missing, and the FTA will not simply forget them.
Settle the liability
Any tax, plus any penalties already accrued. An outstanding balance blocks the deregistration.
Apply to deregister within 20 business days of becoming eligible
This is the clock that is already running. It starts when you stop making taxable supplies, not when you get around to the paperwork.
Submit the final return
The FTA issues it for the final tax period once deregistration is approved.
Then cancel the trade licence
In that order. Cancelling the licence first does not close the VAT registration, as the registration and the penalties carry on without it.
That last step is the one that ruins people. Cancelling the licence feels like closing the company. It isn't. The VAT registration is a separate obligation with a separate authority, and it keeps billing you AED 1,000 a month while you believe you're finished.
Voluntary disclosure: the cheapest way to be wrong
If you find an error in a return you have already filed, you can correct it with a voluntary disclosure. It carries a penalty of 1% per month on the tax difference, from the original due date.
That is far cheaper than being found. The comparison is not disclose versus nothing, but rather disclose at 1% a month, or be assessed later with penalties that run to a 300% cap. If you know something is wrong, the arithmetic is not close.
What we'd actually do
For most businesses, a penalty review is a two-hour job with a very asymmetric payoff:
- Pull the filing history from the FTA portal and find the gaps. Missed nil returns are invisible until you look.
- Check the last 12 months of taxable supplies against AED 187,500. If you're below it, the 20-business-day clock may already be running.
- List every entity in the group, including the ones nobody thinks about. Dormant companies are where this hides.
- If there's an error, quantify it and disclose it at 1% rather than wait to be assessed at up to 300.
If your filings are clean and you're above the threshold, there is nothing to do and nothing to buy. Most of the value here is in finding out that you're fine, or finding out that you aren't, while the number is still small.
This is general guidance, current as at July 2026. Penalty amounts and deregistration conditions are set by Cabinet Decision and have been amended before, so check the FTA's current published schedule before relying on any figure, including these.
Check the entities you'd forgotten about
If you have a company you stopped using, a licence you cancelled without deregistering, or a year where revenue dropped below AED 187,500, there is a real chance a penalty is accruing right now at AED 1,000 a month.
Our tax and compliance team will pull the filing history for every entity you hold, tell you exactly where you stand, and handle the deregistration and any voluntary disclosure. The clean-up is almost always cheaper than the wait, and if there's nothing wrong, you'll have that in writing.
Still trading and want the filings simply to stop being your problem? That's what our accounting and bookkeeping service is for.
Have a question about this?
Talk to a named advisor, not a helpdesk. Book a free call.
Book a free callTags
