UAE corporate tax accepts financial statements prepared on the cash basis where the taxable person's revenue does not exceed AED 3 million, or in exceptional circumstances with the FTA's approval. Cash basis records income when cash is received and costs when they are paid. Others must use the accrual basis under IFRS.
What the rule says
Ministerial Decision No. 114 of 2023 sets out the accounting standards and methods for corporate tax. IFRS is the base standard, and the decision allows the cash basis for a taxable person whose revenue does not exceed AED 3 million, or through an application to the FTA in exceptional circumstances. Different summaries use slightly different wording on the limit, so read the decision before relying on an exact boundary figure. See also IFRS vs IFRS for SMEs.
Cash basis against accrual basis
| Event | Cash basis | Accrual basis |
|---|---|---|
| Invoice issued in December, paid in February | Income in February | Income in December |
| Supplier bill received in March, paid in April | Cost in April | Cost in March |
| Annual rent paid in advance | Cost when paid | Spread across the year |
| Customer deposit received | Income when received | Liability until earned |
When it helps
The cash basis is simpler. A freelancer or small service business with few receivables and payables can keep records from the bank statement and avoid accruals, prepayments and accrued income. Small businesses also like it because tax follows cash received.
When it can mislead
- A business with large unpaid sales invoices shows less profit than it earned and may mislead the owner about performance.
- A business that pays suppliers late looks more profitable than it is.
- Banks and investors may expect accrual accounts, which can mean keeping two sets of records.
- VAT is separate. VAT is due by reference to the tax invoice date and tax point, not to when cash arrives. See VAT on advance payments.
Measuring revenue against the limit
Revenue is the total from your business in the period. Take care with related-party revenue, which commentary says should be measured on an arm's length basis, and with a period shorter or longer than 12 months. If you are close to the limit, watch the trend in the year, because crossing it means moving to accruals for the whole of the next period.
Switching from cash to accruals
When revenue grows beyond the limit, you must restate opening balances on the accrual basis, including receivables, payables, prepayments and accruals, so that the first accrual year does not duplicate or miss income. Plan this a quarter ahead with your accountant. Our guide to bookkeeping for small businesses shows the records that make the switch easy.
Audit and tax groups
The cash basis is not available to every entity. If you are in a tax group or need audited statements, expect IFRS accrual accounting. See is audit mandatory in the UAE and qualifying free zone persons.
A worked example
A designer invoices a client AED 60,000 in December and is paid in February. On the cash basis, the AED 60,000 is income in the year of receipt. On the accrual basis, it is income in December. Suppose she also pays a software subscription of AED 12,000 in January for the whole year. On the cash basis, the full amount is a cost in that year; on the accrual basis, it is spread over the months used. Because the timing differs, the profit in each year is different even though the total over two years is the same. For corporate tax, this timing matters for the period in which tax is due and for the threshold tests.
Practical bookkeeping on the cash basis
- Record every receipt and payment on the day the cash moves.
- Keep the invoice with the payment record, since you still need tax invoices for VAT.
- Do not record unpaid invoices as income.
- Track unpaid invoices in a separate list so you know what you are owed and what you owe.
VAT is a separate calculation
Using the cash basis for corporate tax does not change how VAT works. Registered businesses account for output tax by the tax point, usually the date of supply, invoice or payment, whichever rule applies first. A business can therefore owe VAT on an invoice before the customer has paid. See VAT on advance payments and how VAT works.
Lenders and investors
Banks usually want accrual accounts, especially if you ask for a facility. If you use the cash basis for tax, keep an accrual view for management and lending conversations. A tidy set of receivables and payables lists will do much of the job. See management accounts vs statutory accounts.
How to decide
- Estimate revenue for the coming period against the AED 3 million limit.
- List your receivables and payables at the end of a typical month.
- If both are small, the cash basis is likely fine.
- If either is large, test the profit on both bases before deciding.
- Review the choice each year.
Setting up a simple threshold alert
Track revenue each month against AED 3 million using a simple spreadsheet or an accounting report. Set an alert at 80% of the limit, so you have time to prepare for the move to accrual accounting. If your revenue is seasonal, forecast the full year, not only the year to date.
Records you still need on the cash basis
- Bank statements for every account.
- A sales list with invoice numbers and dates, even if the income is recorded on receipt.
- Supplier invoices and receipts.
- A list of unpaid invoices both ways.
- VAT working papers if you are registered.
When to take advice
If you are near the limit, expect rapid growth, are planning to sell the business or plan to raise funds, ask your adviser to model both bases. See our accounting services and corporate tax services.
Frequently asked questions
A taxable person whose revenue does not exceed AED 3 million, or in exceptional circumstances with FTA approval, under Ministerial Decision 114 of 2023.
Income is recorded when cash is received and costs when cash is paid, instead of when they are earned or incurred.
No. VAT follows the tax invoice date and tax point rules, not the date cash is received.
You move to the accrual basis under IFRS, and opening balances must be restated so income and costs are not missed or duplicated.
Not always. It is simpler but can distort profit if you have large receivables or payables.
Sources differ on whether the threshold route needs any application. Confirm against the decision and your own circumstances.