Amendment in Voluntary Disclosure (VD) Penalty Structure
As per Cabinet Decision No. 129 of 2025, issued on 9 October 2025 and effective from 14 April 2026, the penalty structure applicable to Voluntary Disclosures (VDs) submitted to the Federal Tax Authority (FTA) has been amended.
This amendment changes the way penalties are calculated on tax difference arising from errors or omissions corrected through a VD.
Comparison Between Current and New VD Penalty Structures
| Particulars | Current Penalty Structure (Before 14 April 2026) | New Penalty Structure (Effective 14 April 2026) |
| Legal Reference | Cabinet Decision No. 108 of 2021 | Cabinet Decision No. 129 of 2025 |
| Penalty Computation Period | From the date of original return/tax assessment to the VD submission date | From the day following the tax return due date (or refund application date) until the VD submission date |
| Penalty Rates
|
If VD has been submitted, following penalty shall be applied on unsettled tax amount:
• Within 1 year – 5% |
A monthly penalty of 1% on the tax difference, for each month or part thereof. |
Illustrative Example
| Particulars | Scenario A – Before 14 April 2026 | Scenario B – After 14 April 2026 |
| Tax Difference | AED 1,000,000 | AED 1,000,000 |
| Tax Period | January 2022 | January 2022 |
| VD Filing Date | December 2025 | December 2025 |
| Time Gap | 48 months (4 years) | 48 months (4 years) |
| Penalty Computation | 30% × 1,000,000 = AED 300,000 | 1% × 48 months × 1,000,000 = AED 480,000 |
| Observation | Penalty under current structure is AED 300,000 | Penalty under new structure is AED 480,000, which is 60% higher than the old structure. |
Key Insights
- Filing before April 2026 allows significant penalty savings, especially for older VAT periods.
- Where the taxable person submits a voluntary disclosure after being notified that it will be subject to a tax audit by the authority, the penalty will be seven times higher than if it had been submitted before the audit.
Importance of VAT Health Check
A VAT Health Check is a detailed review of your business’s VAT compliance, processes, and records to ensure adherence to UAE VAT laws and to identify potential risks before an FTA audit.
Key Objectives
- Compliance Review: Verify VAT returns, tax invoices, and documentation align with UAE VAT law.
- Error Detection: Identify misclassifications, underreported output tax, or overstated input tax.
- Penalty Mitigation: Detect discrepancies early to allow VD submission before April 2026 under the current, lower penalty regime.
- Process Improvement: Streamline internal VAT controls and ensure accurate record-keeping.
Conclusion
To conclude a VAT Health Check before 14 April 2026 offers a critical opportunity for businesses to:
- Review VAT compliance thoroughly.
- Identify and correct potential errors through VD under lower penalty rates.
- Avoid the 7x audit-triggered penalty risk; and
- Strengthen compliance culture within the organization.
Recommendation:
Businesses are strongly advised to perform VAT Health Checks now and submit any required Voluntary Disclosures before 14 April 2026 to minimize penalty exposure under the upcoming regime.