The UAE Federal Tax Authority has issued Directive on Tax Transactions No. 2 of 2026, providing important clarification on how VAT adjustments should be reported when a company has already left a VAT Tax Group.

The Directive was issued on 8 July 2026 and will take effect from 1 August 2026.

The Issue

A company may leave a VAT Tax Group but continue to remain registered for VAT under its own individual Tax Registration Number.

After leaving the group, the company may still need to adjust a transaction that originally arose while it was a member of the VAT Group.

This may happen where the company later needs to reduce:

• the value of a taxable sale previously reported through the VAT Group; or
• the value of a taxable expense for which input VAT was previously recovered through the VAT Group.

The key question is:

Should the adjustment be reported by the former VAT Group, or by the company that has left the group?

The FTA’s Clarification

Under the new Directive, the company that left the VAT Group must report the adjustment in its own VAT return, provided that:

• the company remains registered for VAT;
• the taxable supply was made, or the taxable expense was incurred, before the company left the VAT Group; and
• the original transaction was previously reported in the VAT Group’s VAT return.

The original transaction should not be reported again.

Only the subsequent adjustment must be reflected in the former group member’s individual VAT return.

Example: Adjustment to a Taxable Sale

Company A was a member of a VAT Tax Group when it issued the following invoice:

Particulars	Amount
Taxable sale	AED 100,000
VAT at 5%	AED 5,000
Total invoice	AED 105,000

The invoice was reported in the VAT Group’s VAT return.

Company A later leaves the VAT Group but remains separately registered for VAT.

After leaving the group, the value of the sale is reduced by AED 20,000.

The required adjustment would be:

Particulars	Amount
Reduction in taxable value	AED 20,000
Output VAT adjustment	AED 1,000
Total reduction	AED 21,000

Company A must report the AED 20,000 reduction and the corresponding AED 1,000 output VAT adjustment in its own VAT return.

It should not report the original AED 100,000 sale again, because that transaction was already declared through the VAT Group.

Where the entire invoice is cancelled or reduced, Company A would report the full adjustment of AED 100,000 and AED 5,000 VAT in its individual VAT return.

The Rule Also Applies to Expenses

The Directive is not limited to sales.

Suppose Company A incurred a taxable expense while it was part of the VAT Group, and the related input VAT was recovered through the group’s VAT return.

After Company A leaves the VAT Group, the value of that expense is reduced.

Company A must make the corresponding input VAT adjustment in its own VAT return.

This means that both output VAT and input VAT adjustments may remain relevant after a company exits a VAT Group.

Supporting Records Must Remain Available

A former VAT Group member must retain sufficient documentation to prove that the adjustment relates to a taxable sale or expense previously declared through the VAT Group.

Businesses should maintain a clear audit trail, including:

• the original tax invoice;
• the credit note, debit note or other adjustment document;
• the relevant VAT Group return;
• accounting ledgers;
• contracts;
• correspondence; and
• supporting VAT calculations.

These records may be required to demonstrate that the original transaction was correctly reported by the VAT Group and that only the subsequent adjustment was included in the former member’s individual return.

Why This Matters

Leaving a VAT Group does not automatically close all VAT matters connected with the period during which the company was a group member.

Commercial adjustments, cancellations, discounts, returns and corrections may arise months or even years after the original transaction.

Under the Directive, the former member may remain responsible for reporting those adjustments, even though the original transaction appeared in the VAT Group’s historical return.

Businesses that fail to maintain access to historical records may therefore face difficulties when preparing future VAT returns or responding to an FTA review.

Practical Steps for Businesses Leaving a VAT Group

Companies preparing to exit a VAT Group should:

1. identify outstanding invoices, expenses and transactions that may later require adjustment;
2. retain copies of the relevant VAT Group returns and supporting VAT workings;
3. ensure accounting records remain accessible after the exit;
4. establish a process for issuing and recording post-exit credit notes and other adjustments;
5. reconcile adjustments against the original group-reported transactions; and
6. ensure the adjustment is reported only once in the correct VAT return.

Key Takeaway

The original transaction remains in the VAT Group’s historical VAT return.

Any later adjustment must be reported by the company that left the group, provided it remains registered for VAT and the original transaction was previously declared through the VAT Group.

Businesses exiting VAT Groups should therefore preserve their historical invoices, VAT workings and supporting documentation, as past transactions may still create reporting obligations after the company has left the group.