Voluntary Disclosure Before vs After Tax Audit Notification — The Penalty Difference Under Cabinet Decision No. 40 of 2017
Items 11 and 12 of Table 1 in Cabinet Decision No. 40 of 2017 draw a sharp distinction between two scenarios: a taxpayer who proactively submits a voluntary disclosure to correct an error, and one who fails to do so before being notified that the FTA will conduct a tax audit. The financial consequences of this timing difference are substantial.
Item 11 — Voluntary Disclosure Before Audit Notification
Where a taxable person or taxpayer submits a voluntary disclosure to correct errors in a Tax Return, Tax Assessment, or tax refund application — and does so before being notified of a forthcoming tax audit — the penalty under item 11 is a monthly penalty of 1% on the Tax Difference for each month or part thereof.
This 1% monthly penalty is calculated from the day following the due date of the Tax Return, or the submission of the relevant tax refund application, until the date the voluntary disclosure is submitted. There is no fixed percentage penalty added on top — only the 1% monthly accumulation on the Tax Difference.
Item 12 — Failure to Submit Before Audit Notification
Where the taxable person or taxpayer fails to submit a voluntary disclosure before being notified that the FTA will conduct a tax audit, two penalties apply simultaneously:
- Fixed penalty: 15% of the Tax Difference.
- Monthly penalty: 1% of the Tax Difference per month or part thereof — but calculated differently depending on what happens next.
The monthly penalty calculation under item 12 has two sub-scenarios:
- Sub-scenario A: If the taxpayer submits a voluntary disclosure after being notified of the audit, the 1% monthly penalty runs from the day following the due date of the Tax Return (or submission of the tax refund application) until the date of submitting the voluntary disclosure.
- Sub-scenario B: If the taxpayer never submits a voluntary disclosure, the 1% monthly penalty runs from the day following the due date of the Tax Return (or submission of the tax refund application) until the date of issuance of the Tax Assessment.
The Cost Difference — A Practical Comparison
Assume a Tax Difference of AED 1,000,000 arising from an error in a VAT return filed 18 months ago.
Scenario A (Item 11 — voluntary disclosure before audit notification): Penalty = 1% × 18 months × AED 1,000,000 = AED 180,000.
Scenario B (Item 12 — no voluntary disclosure, audit notification received, then VD submitted): Penalty = 15% fixed (AED 150,000) + 1% × 18 months (AED 180,000) = AED 330,000.
The difference is AED 150,000 — the fixed 15% penalty that applies only when the taxpayer fails to act before the audit notification. Acting proactively under item 11 eliminates the fixed component entirely.
Strategic Implications
The decision to submit a voluntary disclosure must be made before the FTA issues an audit notification. Once that notification is received, the item 12 regime applies regardless of how quickly the taxpayer then submits. The 15% fixed penalty cannot be avoided after the notification is issued.
This structure creates a strong incentive for regular tax return reviews and proactive correction of errors. Businesses with complex transaction structures, intercompany arrangements, or cross-border supplies should conduct periodic internal reviews to identify potential Tax Differences before the FTA initiates a review.
What counts as an audit notification that triggers item 12?
A tax audit notification under Article 20 of the Tax Procedures Law is formal written notice from the FTA that it will conduct a tax audit on the person. The voluntary disclosure must be submitted before receipt of this notification to qualify for item 11 treatment. A general inquiry or information request from the FTA is not necessarily an audit notification — the specific form and legal basis of the FTA communication determines which regime applies.
Can the 15% fixed penalty be challenged through reconsideration?
Yes. The reconsideration and TDRC objection process is available for all administrative penalties, including the fixed 15% penalty under item 12. A successful challenge on the underlying Tax Difference will reduce the base on which the 15% is calculated. A challenge on procedural grounds — for example, whether the audit notification was validly issued — could potentially remove the fixed component entirely if the notification is found to have been defective.
Does the 1% monthly penalty run concurrently with the 14% late payment penalty?
Yes. The 1% monthly penalty on the Tax Difference under items 11 and 12 is a separate penalty stream from the 14% per annum late payment penalty under item 9. Both can run simultaneously if there is both an unpaid tax liability and a Tax Difference arising from an incorrect return. The penalties are calculated on different bases — item 9 runs on the total unsettled Payable Tax, while items 11/12 run on the Tax Difference specifically.
What is the Tax Difference for purposes of items 11 and 12?
The Tax Difference is defined in Article 1 of Cabinet Decision No. 40 of 2017 as the difference between the Due Tax as calculated and the Due Tax as it should have been calculated. It is the error amount — not the total tax — on which the percentage penalties are based. If the return was correct on its face but the FTA's audit identifies additional tax through a different methodology, the gap between the two figures is the Tax Difference.
How Abdelhamid & Co. Can Help
We advise clients on voluntary disclosure timing, prepare the disclosure documentation, calculate penalty exposure under items 11 and 12, and represent clients in reconsideration and TDRC proceedings. Contact us from Sharjah for UAE-wide coverage.
Last reviewed: 16 May 2026 — Abdelhamid M. Abdelhamid, FTA Tax Agent TAAN: 20033908 | EAAA Fellow No. 124 | IASCA Fellow No. 1361