If your business has been carrying a VAT credit balance forward "for later", later may be closer than you think. From 1 January 2026, UAE law puts a five-year limit on claiming those balances. Add a revised penalty regime that took effect in April, and this is a good moment to tidy up your VAT records. Here's what changed, what hasn't, and what to do before 31 December 2026.
What Has Changed in UAE Tax Rules in 2026?
Two separate changes are easy to mix up:
| Change | Source | Effective |
| Five-year refund limit, plus other Tax Procedures Law amendments | Federal Decree-Law No. 17 of 2025 | 1 January 2026 |
| Revised administrative penalties | Cabinet Decision No. 129 of 2025 | 14 April 2026 |
They're connected in practice, since both reward businesses that keep accurate records and correct errors early. But they're different rules with different dates, so don't treat them as one.
What Is the New UAE Penalty Regime?
Cabinet Decision No. 129 of 2025 replaces the earlier penalty framework (Cabinet Decisions 49 and 108 of 2021). Crowe's summary describes it as lighter in several areas. Not everything fell, though. Registration and deregistration penalties, late return penalties and most VAT-specific penalties are reported as unchanged.
Here are some examples of what did change:
| Violation | Previous | Revised |
| Not providing Arabic documents when requested | AED 20,000 | AED 5,000 |
| Not notifying the FTA of registration record changes | AED 5,000 (AED 10,000 if repeated) | AED 1,000 (AED 5,000 if repeated within 24 months) |
| Legal representative not notifying their appointment | AED 10,000 | AED 1,000 |
| Incorrect tax return | AED 1,000 (AED 2,000 if repeated) | AED 500, waived if corrected before the due date |
This isn't a full list. Check the specific penalty that applies to your situation.
How Do the New Rules Affect VAT Errors and Voluntary Disclosures?
This is where the new regime matters most for finance teams. According to Crowe's summary:
- Voluntary disclosure: the old yearly percentage tiers (5% up to 40%) are replaced with a continuous 1% per month on the tax difference.
- Late payment: the old 2% initial charge plus 4% a month (capped at 300%) becomes a flat 14% a year, about 1.167% a month.
- Failing to disclose before an audit notice: reduced from 50% plus 4% a month to 15% plus 1% a month.
A quick illustration, based on those rates: correcting a AED 50,000 error six months late would cost about AED 3,000 in monthly penalties, where the old structure would have added a tier percentage on top. These figures are simplified, so use them to get a sense of scale, not to compute a bill.
The takeaway is simple. Correcting early is cheaper, but correcting doesn't automatically mean no penalty. Work out the right route, whether that's amending a return or filing a voluntary disclosure, and get advice on anything unclear.
What Is the Five-Year VAT Refund Limit?
Under the amended Tax Procedures Law, a request to refund a credit balance, or to use it against tax liabilities, must be made within five years from the end of the relevant tax period. Miss the window, and your right to recover that balance may lapse unless an exception applies.
In practice, that changes how you should treat an old credit:
- Each balance has its own clock, because each starts from its own tax period.
- A balance that sat comfortably on the books for years now has a deadline.
- Reconciling credits is no longer just good housekeeping. It protects money you're entitled to.
What Happens to Older VAT Credit Balances?
There's transitional relief. According to the Ministry of Finance, it covers taxpayers whose five-year period expired before 1 January 2026, or expires within one year after that date. They can file refund requests within one year from 1 January 2026, which points to 31 December 2026. The MoF page doesn't spell out that date, so confirm it in the legislation.
That's about two months away. If you have an old credit, here's a simple plan:
- List every unused credit balance and its tax period.
- Work out which ones are past, or close to, five years.
- Check whether the transitional relief applies.
- File before the deadline, with supporting records.
A related point: if the FTA hasn't yet decided a request, the MoF says you may submit a related voluntary disclosure within two years of filing it.
Are There Exceptions to the Five-Year Deadline?
Yes, but they're narrow. The MoF says a taxpayer can still file where the credit balance arises after the five-year period ends, or in its final 90 days in specific cases. The detailed conditions sit in the legislation, and some commentary describes different time allowances depending on how the balance arose. Don't assume you qualify. Treat these as exceptions, not extensions.
The same amendments also let the FTA audit or assess after a limitation period has expired in certain cases, such as refund requests filed in the final year. So a late claim can also invite a closer look.
How Can Businesses Avoid VAT Penalties and Missed Refunds?
- [ ] Reconcile VAT returns against accounting records, invoices and payments
- [ ] List every credit balance with its tax period and origin
- [ ] Calculate each balance's five-year deadline
- [ ] Flag balances that may qualify for transitional relief and file before 31 December 2026
- [ ] Fix errors through the right route, and do it early
- [ ] Keep registration details and legal representative details current
- [ ] Track pending refund requests and FTA correspondence
- [ ] Build a compliance calendar for filings, payments and refund deadlines
- [ ] Assign one person to own refund tracking
- [ ] Get professional advice on old or complex balances
So, What Should You Do First?
Start with the oldest credit balances, because they carry the nearest deadline. Then reconcile your recent returns, so you catch errors while correcting them is still cheap. Because details vary by provision, confirm the final position against the legislation or with your tax adviser.
Want Your VAT Records Audit-Ready?
Refund claims and corrections are only as strong as the records behind them. Global Software helps UAE businesses set up Tally Prime so VAT returns, credit balances and supporting documents reconcile cleanly, and the numbers are ready when you need them.
Not sure how old your VAT credits are? Talk to Global Software and get your VAT records reviewed.
What Are the Most Common Questions About VAT Penalties and Refunds?
When did the new penalty regime start? Cabinet Decision No. 129 of 2025 took effect on 14 April 2026.
Were all VAT penalties reduced? No. Several were reduced or restructured, while others, including late return penalties, are reported as unchanged.
What is the five-year VAT refund limit? Requests to refund or use a credit balance generally must be made within five years of the end of the relevant tax period.
What if I miss the deadline? The right to the balance may lapse, unless an exception or the transitional relief applies.
Can I still claim old credit balances? Possibly. Transitional relief points to a deadline of 31 December 2026 for qualifying balances. Verify eligibility first.
Are there exceptions to the five-year limit? Limited ones, such as balances arising after the period ends or in its final 90 days in specific cases.
What should I do if I find an error in a VAT return? Work out the correct correction route and act promptly. Penalties depend on the circumstances.
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