Leaving a VAT credit sitting indefinitely on a UAE tax account may now have a significant consequence.
The Federal Tax Authority has clarified amendments introducing a five-year period within which a Taxable Person must either claim a refund of excess Recoverable Tax or use that amount against tax or administrative penalties.
If the balance remains unused when the five-year period expires, the right to claim or use it can lapse.
For businesses that routinely carry forward VAT credits, this is an important compliance deadline.
What Is Excess Recoverable VAT?
A VAT-registered business may find that the Input Tax it is entitled to recover exceeds the Output Tax due for a particular Tax Period.
This can occur for many reasons.
For example, a business may have:
- incurred substantial start-up expenditure;
- purchased significant equipment;
- made large capital investments;
- generated mainly zero-rated supplies;
- experienced temporary reductions in sales; or
- accumulated Input Tax faster than Output Tax became due.
The result can be an excess Recoverable Tax balance, effectively leaving the business in a VAT credit position.
That credit may potentially be carried forward, used against liabilities or refunded, subject to the applicable rules.
The important change is that the credit cannot necessarily remain available forever.
The Five-Year Period
Article 74 of the VAT Decree-Law now provides a specific five-year period for requesting a refund of excess Recoverable Tax.
The period is calculated from the end of the Tax Period in which the excess arose.
During that five-year window, the Taxable Person can generally:
- use the credit against Payable Tax;
- use it against administrative penalties imposed on the Taxable Person; or
- submit an application requesting a refund.
If none of those actions is taken before the period expires, the right to the remaining credit can lapse.
That means businesses should know not only the amount of VAT credit they hold, but also when each part of that balance originally arose.
The FTA Gives a Clear Example
The FTA’s Public Clarification illustrates the rule with a straightforward example.
If a Taxable Person submits a VAT return for the Tax Period ending 31 January 2026 and that return creates an excess Recoverable Tax balance, the five-year period runs until 31 January 2031.
During that time, the business may use the credit to settle tax or administrative penalties or submit a VAT refund request.
If the balance has not been used or refunded by the end of the five-year period, the right to it can be forfeited.
This makes the expiry date a genuine financial issue rather than merely an administrative deadline.
Using Part of the Credit Does Not Reset the Clock
A particularly important point is that using part of an old VAT credit does not necessarily give the remaining amount a fresh five-year period.
Suppose a business has a credit balance and uses part of it to settle a later VAT liability.
The unused remainder continues to be subject to the original time limit.
When the five-year period expires, the right to use or claim the remaining balance may lapse.
Businesses therefore cannot assume that occasional utilisation of part of a credit indefinitely preserves the balance.
The age of the underlying VAT credit remains important.
The FTA Can Offset the Credit First
Before a refund is paid, excess Recoverable Tax may be offset by the FTA against amounts already owed by the Taxable Person.
These can include:
- Payable Tax; and
- administrative penalties.
Only the remaining excess can then be available for refund.
This means a VAT refund application should not be viewed in isolation from the wider tax account.
A business expecting a cash refund may receive less than the headline credit balance if outstanding tax liabilities or penalties must first be settled through offset.
Does a Business Have to Request a Refund Immediately?
No.
The introduction of the five-year deadline does not mean every business must immediately request payment of every VAT credit balance.
A business may have legitimate reasons for carrying the credit forward.
For example, it may expect future Output Tax liabilities against which the credit can be used.
The important difference is that carrying the credit forward must now be managed with the statutory time limit in mind.
Businesses should therefore decide deliberately whether to:
- continue carrying the credit;
- use it against liabilities; or
- seek a refund.
Allowing the balance simply to remain on the account without monitoring its age creates unnecessary risk.
Why Businesses Can Lose Track of Old VAT Credits
In practice, VAT credit balances can accumulate over several years.
The current balance shown in an accounting system may therefore consist of amounts originating from different Tax Periods.
For example, a business may have:
- one component arising in 2026;
- another arising in 2027;
- later credits arising in 2028; and
- subsequent debits and offsets applied against the overall account.
If the business only monitors the net balance, it may lose sight of which underlying credits are approaching expiry.
This is particularly relevant to businesses that regularly remain in a VAT refund position.
Finance teams should therefore maintain sufficient records to identify the Tax Period from which excess Recoverable Tax originated.
Which Businesses Should Pay Particular Attention?
The five-year deadline may be especially relevant to businesses that frequently generate VAT credits.
These can include:
- exporters;
- businesses making substantial zero-rated supplies;
- companies undertaking major capital expenditure;
- property developers;
- businesses in investment or expansion phases;
- companies with significant imported goods or services; and
- businesses whose commercial activity produces recurring excess Input Tax.
For these businesses, VAT credits can represent substantial amounts of working capital.
Losing the right to claim an old balance because a deadline was overlooked could therefore have a meaningful financial impact.
What Should Businesses Do Now?
A practical review should begin with the existing VAT credit position.
Businesses should consider:
1. Identify current excess Recoverable Tax
Determine whether the FTA tax account currently shows an unused VAT credit.
2. Trace the credit back to the relevant Tax Periods
Identify when the balance originally arose rather than looking only at the current total.
3. Calculate expiry dates
Apply the five-year period from the end of each relevant Tax Period.
4. Review outstanding tax and penalties
Determine whether any part of the credit may be offset against existing liabilities.
5. Decide whether to carry forward or refund
Businesses approaching the deadline should determine whether continued carry-forward remains commercially appropriate.
6. Retain supporting records
VAT refund claims should be supported by proper invoices, accounting records and evidence substantiating the Recoverable Tax.
The key is to treat VAT credits as assets requiring active management rather than passive balances that remain available indefinitely.
The Wider Compliance Lesson
The amendment reflects a broader shift towards clearer time limits within the UAE tax system.
Businesses are expected to manage their tax positions within defined statutory periods.
That applies not only where tax is payable to the FTA, but also where money may be recoverable from the Authority.
A taxpayer may have a legitimate VAT credit, but legal entitlement alone does not necessarily preserve it indefinitely.
Procedural deadlines matter.
Conclusion
The introduction of a five-year deadline for excess Recoverable Tax changes the way UAE businesses should manage VAT credit balances.
The period runs from the end of the Tax Period in which the excess arose.
Within that window, the balance may be used against Payable Tax or administrative penalties, or the business may apply for a refund.
If the balance remains unused when the five-year period expires, the right to claim or use it can lapse.
For VAT-registered businesses, the practical lesson is simple:
Do not monitor only how much VAT credit you have. Monitor how old it is.
A legitimate tax asset can still be lost if the deadline for using or claiming it passes.
Al Kabban & Associates
For businesses seeking guidance, Al Kabban & Associates, with over 30 years of experience in UAE law and recognition by Legal 500, stands ready to help corporations build resilience against legal risks while ensuring compliance with local and international standards. For more information or to schedule a consultation, contact us at +971 4 453 9090 or visit www.alkabban.com. You can also follow us on social media for more updates on everything law related in the UAE: @Alkabban_Law
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