It has been more than three years that the term “VAT” has become an integral part of business communities in the UAE. We can surely say that VAT for business is like blood in the body. The UAE’s Federal Tax Authority (FTA), for its part, has taken proactive measures to clarify existing regulations and introduce new VAT guides and clarifications in the past few years. From over three years since VAT implementation, the Federal Tax Authority has issued over 20+ guides, 20+ VAT public clarifications, and 500+ private clarifications. Further, the tax authorities have also shown flexibility in relations to conducting VAT Audits— to the benefit of UAE businesses where mainly large business were witnessed with VAT Audit in the initial years of VAT implementation, however, nowadays medium to small businesses are also coming within the ambit of VAT Audits – Does this indicate a new normal compliance requirement in the UAE?
Through this article, I have majorly focused on simplifying the VAT Audit process which every business in the UAE should consider while preparing themselves for any VAT audits in the future.
As UAE follows self-assessment system for filing VAT returns, VAT audit becomes an important tool in the hands of FTA to assess the level of VAT compliance of taxpayer.
The FTA has a time limit to initiate VAT audit within 5 years from the end of relevant tax year, E.g.: Audit for the Financial Year Ended 31 December 2018 can be initiated any time before 31 December 2023. However, as exceptions, (a) The above time limit may be extended by additional 4 years on the request of the FTA; (b) Real estate related records of any business entity should be maintained for a period of 15 years.
Who would be selected for VAT Audit? – There is no precise reason for selection of audit cases by the FTA – Any taxpayer is at equal chance of undergoing VAT audit. Some of the indicative audit trigger points, in our experience, could be: (i) large taxpayer; (ii) VAT refundable position; (iii) incorrect filing of VAT returns; (iv) non-payment of taxes; (v) mixed supplies (taxable and exempt); etc.
Types of Audit and Audit Process – There are different types of VAT audits such as refund audit, regular audit, field audit and correspondence audit. Irrespective of the type, a typical audit process is outlined as below:
1) Issuance of Notice by FTA
2) Collation and submission of the requested information to the FTA within 5 business days from the date of notice.
3) Request for additional information, including any site visits by FTA.
4) Audit closure – FTA issues its decision.
There is no defined timeline for FTA to complete the audit. It depends on the size and complexity of the business.
Information requested by the FTA – FTA may ask for various types of information/documents from businesses at the time of issuance of VAT Audit notice. The common information requested during VAT audit are:
• Transaction listing in the template shared by FTA – Format is periodically updated.
• Audit questionnaire (contains 30-35 questions) – Needs to be filled very precisely as it gives high level understanding of business to the FTA.
• Brief note on business activities capturing nature and process of sale and purchase transactions.
• List of categories of income received since registration and its VAT treatment.
• Sample tax documents such as tax invoices, tax credit notes, import declarations, etc.
• Full trial balance and audited financial statements (if any)
• Reconciliation of VAT returns with the trial balance.
• Corporate group structure including all branches and locations.
• Input tax apportionment – method used and calculation.
It is pertinent to note that the above list is non-exhaustive as FTA may ask for additional details which may vary based on the business operations. Further, such information should be provided within a short span of 5 business days, hence business needs to be well equipped with robust IT system, record keeping of information and trained tax/finance professionals.
Any non-compliance with VAT Audit process attracts hefty penalties. In addition, it is also important to note that a late payment penalty up to 300% may be imposed.
Benefits of VAT Audit
The VAT Audit would highlight to the senior management the level of readiness of the Company to accommodate the FTA’s requests. This would reflect the teams’ ability to adhere to short timelines, system capabilities for report generation and record keeping etc.
• Greater comfort for filed returns in case of a challenge from the authorities and more clarity on remedial measures.
• Identify the areas where private clarification/ administrative exceptions from the FTA, in case of any ambiguous tax treatment, is needed.
• Rectify past errors by way of filing Voluntary Disclosure (if needed) before the start of audit and avail the benefit of reduced penalties under the recent Cabinet Resolution No. (49) of 2021.
• Identify whether Amnesty scheme can be availed under the recent Cabinet Resolution No. (49) of 2021.
How to Prepare for VAT Audit: Businesses are advised to undertake following steps to prepare themselves for VAT audits:
• Pre-audit review of historical tax periods (VAT health check) from an external consultant.
• Obtain private clarification/ administrative exceptions from the FTA, in case of any ambiguous tax treatment.
• Rectification of past errors by way of filing Voluntary Disclosure (if needed) before the start of audit to avoid the incremental late payment penalty.
• Preparing the team and management for audit (it is recommended to assign a single point of contact within the organization to communicate with the FTA).
Based on my experience, I can say that the entire audit process is very interactive – businesses should ensure that everything is in line with the requirements of the FTA and UAE VAT Laws. It is highly probable that every business may get exposed to VAT audit, however, we believe that preparedness is the only key to efficiently manage what is called the “New Normal” in the UAE VAT world.