The Hidden VAT Risk

How Supplier Non-Compliance Can Cost You Your Input Tax Credit

Inside This Article

1. When Invoices Backfire
2. The Compliance Chain Crack
3. Silent Supplier Slipups
4. FTA’s Fine Print
5. Due Diligence, Redefined
6. Shield Your Tax Credits

In the UAE’s VAT regime, claiming input tax credit (ITC) may appear straightforward on the surface: a business pays VAT on its purchases and recovers that VAT from the Federal Tax Authority (FTA) by offsetting it against its output tax. However, this process rests on one critical—but often overlooked—assumption: the supplier is fully compliant with VAT laws.

In this article, we unpack a growing issue in VAT compliance—denial of input tax credit due to supplier default or non-compliance—and offer practical strategies to safeguard your business from falling into this costly trap.

Understanding Input Tax Credit Under UAE VAT Law

Under Article 54 of Federal Decree-Law No. 8 of 2017 (UAE VAT Law), input tax can be recovered by a taxable person on expenses incurred for making taxable supplies, subject to meeting certain conditions:

The recipient must hold a valid tax invoice.

The goods or services must be used for making taxable supplies.
The VAT must have been correctly charged and accounted for by the supplier.
The claim must be made within the time limits (within the same tax period or within the next two years).

While businesses often ensure they receive the correct invoice and use the expense for taxable purposes, many fail to ensure that their suppliers are VAT compliant—leading to input tax disallowance during audits.

When Supplier Non-Compliance Becomes Your Problem

FTA audits have increasingly flagged issues where input tax is disallowed due to the supplier’s failure to:

File VAT returns,
Pay output tax collected,
Register for VAT despite issuing invoices,
Issue valid and complete tax invoices.

Despite the taxpayer (recipient) having no direct control over the supplier’s compliance, the FTA holds the recipient liable for claiming credit based on defective documentation or from non-compliant vendors.

This creates a risky loophole—where businesses can lose significant input tax credits simply because their suppliers are non-compliant, even if the transaction itself was genuine.

Common Real-World Scenarios

Fake or unregistered suppliers: A company unknowingly purchases from a vendor that has issued a tax invoice without being VAT registered. Input tax is rejected.
Delayed or non-filers: Suppliers collect VAT but fail to file returns or remit VAT. During FTA audits, input claims of their customers are denied.
Improper invoicing: Missing TRN, wrong invoice date, or incorrect tax rates can all lead to denial of input credit.

FTA Position on Due Diligence

The FTA has taken a position—explicit or implied through assessments—that the recipient must undertake due diligence before claiming input tax. This includes:

Ensuring that the supplier is VAT registered.
Checking the accuracy of the tax invoice.
Confirming that the supplier is filing returns and not under investigation.
In some cases, verifying that the tax has been paid to the FTA.

While this appears harsh, the rationale is that the input tax system is built on a chain of compliance—and a break in that chain impacts the entire ecosystem.

How to Protect Your Business: Practical Strategies

1. Verify TRNs: Always validate the supplier’s TRN on the FTA portal.

2. Maintain clean documentation: Ensure invoices are complete, correctly dated, and accurately priced.

3. Monitor supplier compliance: Request periodic confirmations that returns are filed and tax is paid.

4. Build supplier terms: Include clauses in vendor contracts requiring VAT compliance and indemnifying your business for non-compliance.

5. Prepare for disputes: Document everything. If challenged by the FTA, your ability to demonstrate due diligence can protect your position.

Closing Thoughts

While VAT is designed to be a neutral tax for businesses, the burden of compliance doesn’t end with your own books. Supplier behavior can directly affect your bottom line. As FTA scrutiny increases, proactive vendor management and robust internal controls are no longer optional—they are critical.

Avoid the VAT trap. Stay vigilant. Protect your input tax credits