The introduction of Value Added Tax (VAT) On 1st January 2018 was a major policy shift for the UAE economy. The Federal Tax Authority (FTA) overseas VAT implementation and compliance across the country. As part of its mandate, the FTA conducts periodic VAT audits on companies to ensure proper compliance. VAT audits can seem intimidating to businesses if they are not adequately prepared. This comprehensive guide focuses on equipping companies with clarity on FTA VAT audits and tips to sail through smoothly.
Understanding VAT Compliance in the UAE
Before diving into the audit process, it is vital to understand the broader VAT compliance requirements for businesses in the UAE.
VAT Registration – Businesses crossing the mandatory VAT registration threshold have to register with FTA. Timely and accurate VAT registration is the starting point for compliance.
Accounting Systems – Businesses need accounting systems capable of handling VAT reporting. The system should allow recording of VAT-related transactions and taxes.
Issuing Tax Invoices – Tax invoices with VAT details must be issued for all taxable sales. Proper invoices help substantiate VAT treatment of transactions.
Filing VAT Returns – Every registered business has to file monthly or quarterly VAT returns. Returns have details of VAT collected, input tax credits claimed etc.
Making Tax Payments – VAT payments have to be made in full and on time based on VAT returns. Delay in remitting VAT dues can lead to penalties.
Preparing for a VAT Audit
Thorough preparation well in advance helps businesses stay audit-ready. Know VAT Regulations –
Study UAE’s VAT law in detail – rates, thresholds, exemptions etc. Monitor updates and changes in VAT rules.
Maintain Robust VAT Records – Keep accurate, complete accounts of all business transactions. Have original tax invoices, contracts, inventory records, bank statements etc.
Conduct Internal VAT Audits – Do periodic self-audits to identify and plug gaps. Helps avoid surprises. Review transactions, returns, taxes paid, and compliance levels.
File Timely VAT Returns – Submit accurate VAT returns and payments before deadline. Delays can increase audit risk and penalties.
The VAT Audit Process by FTA
FTA follows a systematic audit process encompassing:
VAT Audit Notice – Intimation of audit via official email or letter. States scope, documents required, and timelines.
Information Gathering – FTA gathers info related to VAT accounting, payments, returns etc. Supporting records like invoices, bank statements, contracts required.
Site Visits and Interviews – Face-to-face interaction for further verification. Discussion with the finance team to understand VAT treatment.
Evaluating Accounting System – Checks on accounting system’s adequacy for VAT compliance. Review of transaction flows, controls, reconciliation processes etc.
Identifying Non-Compliance – FTA flags inconsistencies, gaps, errors in VAT reporting. The Auditee gets a chance to explain discrepancies with documents.
Audit Report and Conclusions – Findings summarised in formal audit report issued to the company. Specifies corrections, penalties if non-compliance found.
Dealing With VAT Audit Outcomes
Post audit, the focus should be collaboration, correction, and prevention:
Review Audit Observations – Analyze audit findings in detail. Seek professionals’ help if needed.
Collaborate with FTA – Maintain open communication with auditors. Provide added documents and clarifications where possible.
Adjust/Amend VAT Filings – Make recommended changes in VAT returns, payments. Correct errors and non-compliance retrospectively.
Pay Penalties if Applicable – Settle fines and penalties for major compliance gaps uncovered.
Reinforce Internal Controls – Plug process gaps that led to discrepancies. Strengthen accounting system, record keeping for smooth future audits.
Key Takeaways from VAT Audits
Some best practices for businesses include:
- Comprehensive understanding of UAE VAT law
- Maintaining meticulous VAT records
- Timely and accurate VAT return filing
- Internal audits and controls to prevent errors
- Proactive communication and cooperation with FTA
Consulting VAT experts can also help navigate audits smoothly. With robust preparation and responsiveness, businesses can achieve VAT compliance and success in UAE.
Conclusion
Surviving an FTA VAT audit requires thorough preparation, diligent compliance, and a collaborative approach. Businesses should invest time in understanding UAE’s VAT scheme, maintaining robust documentation, performing self-audits, and filing timely returns. When selected for an actual VAT inspection, companies should provide full support to auditors, supply additional records where needed, and readily remedy discrepancies identified.
An open and constructive stance, combined with stringent internal controls, will stand companies in good stead when navigating FTA VAT audits. Expert help can also guide businesses through the audit process.
Overall, VAT audits should be seen as an opportunity to improve compliance, not just a compliance burden. With the right systems and seriousness towards VAT compliance, companies can successfully satisfy auditors and continue their growth journey in the UAE.
FAQs
Non-compliance, discrepancies in returns, complaints can trigger audits. High-risk firms see more scrutiny.
Penalties depend on violation severity – fines, suspension, etc. Minor issues may warrant warnings.
Yes, the UAE tax law permits appeals against unfair or erroneous findings.
Frequency varies based on risk profile. High-risk firms see more frequent audits.
Follow audit report recommendations, pay fines, and file accurate returns.
