This article will give you an overview of circumstances that lead to FTA’s VAT audit in UAE and also few records that need to be prepared and maintained for an tax audit.
Process of FTA VAT Audit
The process of VAT audit in UAE is done by the FTA (Federal Tax Authority) and the main importance or duty of the FTA is to assess the VAT liability and to make sure that the taxable person is following the guidelines of the UAE VAT law or uncover any sort of fraud or inaccurate tax returns.
According to Article 78 of Federal Decree Law it’s mandatory for a taxable person to keep these records as listed below and to be presented to FTA when asked:
- All Tax Credit Notes and alternative documents issued.
- Records of exported Goods and Services.
- Both tax transactions and alternative records relating to products or services receivables
- Details of Goods imported to the state along with Customs declarations and Supplier Invoices.
- To Business, showing Taxes paid for the same.
- All Tax Credit Notes and alternative documents received.
- Records of adjustments or corrections made to accounts or Tax Invoices.
- All Tax Invoices and alternative documents issued.
- Records of Goods and Services purchased and for which the Input Tax was not deducted.
- Records of all imports of any sort of goods and services or supplies.
- Records of Goods and Services that have been disposed of or used for matters not related
VAT returns are necessary for businesses to file, but it must be prepared correctly and reported with the correct values in the correct boxes. In UAE, tax agencies will help you get it done within the prescribed time-limit.
Moreover, significantly, the tax due on or before the stated due date must be paid and cleared off. If you have already employed an authorized tax officer, he/she will ensure compliance with the VAT of the company according to FTA guidelines.
The circumstances due to which FTA’s VAT audit in UAE occurs is if you don’t:
Tax Returns : If there has been incorrect tax returns for eg if the tax amount was wrongly charged that could affect the overall tax returns amount.
Tax Evasion: If there’s a taxable income that has not been disclosed or the payable tax amount is intentionally reduced by the taxable person.
VAT Registration: when you fail to apply for VAT registration within the period defined by the VAT
VAT deregistration: The authority can initiate tax audit to ensure the company has deregistered on proper grounds and applied for deregistration within the timeframe stated in the law.
Perform Pre-audit health check & assess VAT Penalty
The FTA has been informing companies that they will be audited five working days after the date of the email sent to them for the year Jan 1st to April 30th, 2018, and May 1st to July 31st, 2018 tax periods.
Businesses must get ready and ensure that their legitimate expenses, appropriate documents, revenue are all in place and accounted for. Due tax need to be calculated and paid periodically.
VAT Payments and heavy penalties that heavily affect the business’s cash flow statements can be unpleasant for small businesses. They will suffer if they don’t set aside enough funds for their payments.
Audit can be intimidating for anyone who isn’t prepared for it. The FTA will usually notify the auditee in advance, that is, 5 business days. Although, in certain cases like Suspected Tax Evasion or if there is a reason to not notify as it may deter the audit process, the notice will not be given.
The tax audit will be conducted at the business’s place or the FTA’s office. The audit is typically done in FTA’s business hours. The tax auditor in charge of performing the audit should be given the required assistance from the auditee’s side, which may be their tax agent or legal representative.
The following are the conditions that the taxable company must comply to on receiving the tax audit notice;
- The audit grounds need to be accessible.
- Pertinent records of tax, invoices, books of accounts etc. are accessible.
- Pertinent staff should be available.
- Original copies of the documents should be present.
- The Audit FAF File for Auditors need to be generated.
It is the business’s responsibility to generate Audit file in FTA designed FAF file format and respond to the FTA quickly. The business’s VAT accounting software need to capable of doing so.
Once the audit is completed, the FTA will communicate the results to the auditee. If the audit’s results point to any of the following cases, then tax assessment will be issued.
- Failure to apply for registration within the time frame specified by the VAT law.
- Failure to submit a tax return within the time fame specified by the Vat Law.
- Failure to settle the payable tax stated as such on the VAT return that was submitted within the time limit specified by the Tax Law.
- Submitting an incorrect VAT return.
- The registrant failing to account for Tax on behalf of another person when he is obligated to do so under the Tax Law.
- The shortfall in VAT payable as a result of tax evasion.
According to the Cabinet Resolution No. (40) of 2017 on Administrative Penalties for violations of Tax Laws in the UAE, In the event of failure to provide the required records or assistance for tax audit conduct, applicable penalties may be levied on the tax payer.
How to prepare for an audit check:
- Check the timely submission of VAT returns and ensure that you have performed the reconciliation when accounting for the input and output VAT.
- Gather all original documents like income and expenses labelled and organized by tax year.
- All relevant documents should be reconciled with bank records and available to the auditor.
- Tax Invoice requirements need to be met as the payments made should be based on an original invoice marked ‘Invoice’ and supplier VAT registration Number is mentioned on the invoice.
- Ensure that the goods/services qualify as taxable supply and VAT is properly calculated.
- Ensure that the Sales Order Processing system is automatically generating correct VAT values by reference to the customer or type of goods or service, country and designated zones as per VAT Law.
- Check VAT calculation under Capital Asset Scheme for acquisition and disposal of capital assets and/or improve transactions processed during the period.
- Ensure the accuracy of your VAT calculations on Entertainment and Business expenses.
If all the above considerations have been met, the smoother the audit process is for the auditor.
If you are charged with a penalty and don’t agree with the decision, stay patient as you can file for an appeal.
VAT Experts at Executive Business Solutions are committed to providing the best VAT Advisory Service in the UAE to clients in compliance with the rules and regulations of VAT in the UAE having their international experience in Taxation.