UAE Court Allows VAT Recovery from Non-Compliant Suppliers – Introduction
In a significant ruling that could have widespread implications for taxpayers across the UAE, the Abu Dhabi Cassation Court has delivered a judgment that clarifies the rights of taxpayers in recovering Value Added Tax (VAT) from non-compliant suppliers.
The ruling, issued on 8 August 2024, in Case No. 648/2024, addresses a common issue where the UAE Federal Tax Authority (FTA) has historically rejected VAT refund requests due to suppliers failing to provide compliant tax invoices.
This decision now opens the door for taxpayers to seek financial recourse from suppliers, potentially reclaiming substantial amounts of VAT.
Background and Legal Framework
The case involved a construction company that issued a cheque to a supplier as a guarantee for VAT related to a construction project.
The dispute arose when the FTA rejected the company’s VAT refund request, citing a lack of proper documentation—specifically, the necessary VAT invoices from the supplier.
Under UAE VAT Law (Federal Decree-Law No. 8 of 2017), businesses are entitled to recover input tax (VAT paid on goods and services) provided they possess a valid tax invoice.
However, strict compliance with the invoicing requirements, as detailed in Article 59 of the Executive Regulations, is crucial.
Non-compliance has frequently led to the FTA rejecting VAT refund requests, leaving businesses with significant unrecovered VAT liabilities.
In this particular case, the construction company was unable to submit compliant invoices within the required timeframe, leading to the FTA’s rejection of their refund claim. Consequently, the company initiated legal action to recover the VAT from the supplier who had failed to provide the necessary documentation.
UAE Court’s Ruling
The Abu Dhabi Cassation Court’s decision is a pivotal moment in UAE tax law, establishing that taxpayers have a clear legal path to recover VAT amounts from suppliers when refund claims are denied due to non-compliance.
The court upheld the principle that if a supplier issues a non-compliant tax invoice and this results in the FTA rejecting the taxpayer’s VAT refund claim, the taxpayer is entitled to reclaim the corresponding amount from the supplier.
The court’s reasoning was based on the supplier’s obligations under UAE VAT Law.
It emphasized that issuing a compliant tax invoice is a statutory requirement, and failing to do so can have serious financial consequences for the purchaser.
In this case, the court found that the supplier’s failure to provide the necessary VAT invoices within the stipulated period directly led to the FTA’s decision to deny the refund.
As a result, the court ruled that the taxpayer could recover the lost VAT from the supplier.
Moreover, the court underscored the principle of equity, asserting that the financial burden resulting from non-compliance should not fall on the taxpayer.
Instead, the supplier, who failed to meet their legal obligations, should bear the responsibility.
Implications for Taxpayers & Suppliers
General
This ruling has significant implications for both taxpayers and suppliers in the UAE:
For Taxpayers
This decision offers a vital remedy in situations where VAT refunds are denied due to the supplier’s non-compliance with invoicing requirements.
Taxpayers now have a clear legal avenue to seek compensation directly from suppliers, ensuring they are not financially penalised for issues beyond their control.
For Suppliers
The ruling serves as a strong warning to suppliers about the importance of adhering to VAT invoicing standards.
Suppliers must ensure that their tax invoices meet the FTA’s requirements, as failure to do so could lead to substantial financial liabilities, including the need to reimburse clients for denied VAT refunds.
Conclusion
The Abu Dhabi Cassation Court’s ruling in Case No. 648/2024 marks a landmark moment in the UAE’s tax landscape.
It reinforces the critical importance of compliance with VAT regulations and provides a robust legal mechanism for taxpayers to recover amounts denied by the FTA due to non-compliant supplier invoices.
Both taxpayers and suppliers should pay close attention to this ruling and its potential impact on their financial and operational practices.
Final thoughts
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