For years, many UAE businesses treated unutilised VAT credits as a long-term balance carrying them forward indefinitely and waiting for the “right time” to claim a refund. That era has officially come to an end.

From 1 January 2026, the Federal Tax Authority (FTA) has introduced a time limit on VAT credits, fundamentally changing how businesses must manage their VAT positions in the UAE.

This update makes proactive VAT management no longer optional it is now critical for cash flow protection and compliance.

What Has Changed Under UAE VAT Law?

The FTA has introduced a strict five-year limitation period for VAT credits.

The New Rule

VAT credits must be:

• Claimed as a refund, or
• Offset against other tax liabilities,

within five years from the end of the relevant tax period.

If no action is taken within this timeframe, the VAT credit expires permanently and will no longer be recoverable through the EmaraTax system.

In simple terms:
Unused VAT credits now have an expiry date.

The “Legacy VAT Credit” Risk (2018–2020 Credits)

Businesses that have been carrying forward VAT credits from the early years of VAT implementation (2018–2020) are now in a high-risk category.

Transitional Relief Provided by the FTA

To address this, the FTA has introduced a one-year transitional window:

• Businesses have until 31 December 2026 to claim or utilise VAT credits arising from early tax periods.
• After this date, any unclaimed legacy credits may be automatically removed from the EmaraTax portal.

This is a one-time opportunity. Once the window closes, expired credits cannot be reinstated.

Why This Matters for UAE Businesses

VAT credits represent real cash value, not accounting entries. Losing them means:

• Direct impact on working capital
• Reduced liquidity
• Permanent loss of recoverable tax

For businesses with historically high input VAT such as trading, construction, logistics, manufacturing, or capital-intensive sectors, this change could result in significant financial leakage if not managed properly.

3 Critical Actions Your Finance Team Should Take Now

1. Audit Your EmaraTax VAT Credits

Review your VAT credit balances and categorise them by tax period origin.

• Credits arising before 2021 require immediate attention.
• Identify credits approaching the five-year expiry threshold.

2. Shift from “Carry Forward” to “Refund” Strategy

The traditional approach of carrying VAT credits forward indefinitely is no longer viable.

• Large VAT credit balances are now a depreciating asset.
• Businesses should actively evaluate whether to claim refunds or strategically offset credits against future liabilities.

3. Ensure Audit-Ready Documentation

Older VAT refund claims are likely to attract increased scrutiny from the FTA.

Ensure:

• Tax invoices from 2018–2020 are complete and compliant
• Supporting contracts, proof of payment, and records are available
• VAT treatment aligns with the law applicable at the time

Weak documentation may result in delays, rejections, or adjustments.

Common Mistakes Businesses Are Making

• Assuming VAT credits can be carried forward indefinitely
• Ignoring small balances that cumulatively add up
• Attempting refunds without reviewing documentation readiness
• Discovering expired credits only after they disappear from EmaraTax

By the time credits expire, there is no appeal mechanism to recover them.

How The Capital Zone Can Help

At The Capital Zone, we help businesses protect their VAT position through:

• VAT credit ageing analysis
• EmaraTax reconciliations
• VAT refund eligibility assessments
• Documentation review and audit support
• Strategic VAT planning aligned with FTA timelines

Our proactive approach ensures your VAT credits remain recoverable, compliant, and monetised not written off.