What is FTA VAT Audit?
As per Article 1 of Federal decree law, the definition of Tax Audit is “A procedure undertaken by the Authority to inspect the commercial records or any information, data or goods related to a Person to verify the fulfilment of its obligations in accordance with the provisions of this Decree-Law or the Tax Procedures Law.”
FTA VAT audit refers to an audit conducted by the Federal Tax Authority in UAE on businesses’ financial records to ensure that the transactions are accurately reported in their VAT returns. The objective is to verify if the business has complied with the provisions of UAE VAT law, and ensure proper VAT calculations, timely submission of returns and maintenance of VAT-related documentation. In this process, the FTA will ensure that the output tax has been properly collected and paid to the government on time, the refund has been claimed correctly, and returns are properly filed in each tax period.
What are the possible circumstances which may lead to VAT Audit?
The Federal Tax Authority may choose any taxable person for VAT audit based on various factors like review of VAT returns submitted, registration or deregistration, VAT refund application submitted, voluntary disclosures filed, or FTA believes on sufficient grounds that VAT audit is required for a taxable person.
There will be many possible reasons for which FTA think of conducting a VAT audit. Some of the common possible factors which may lead to VAT audit are discussed below.
- Late VAT registration and deregistration
Businesses in the UAE have to comply with the VAT provisions with respect to VAT registration and deregistration requirements. There are many circumstances in which an Entity is liable to apply for registration as well as getting deregistered on time. If any business fails to comply with these requirements, FTA will impose penalties and if required, may initiate a VAT audit to ensure that the Entity applied for registration or deregistration within the timeframe mentioned in the law and based on proper grounds.
- Improper VAT returns
FTA may initiate an audit if they find that the VAT returns submitted were incorrect, filing returns late or incorrect treatment of applicable rates etc.
- Incorrect claim of VAT refund
If FTA identifies any incorrect claim of VAT input while submitting VAT returns or applying for a refund, they may ask for clarification, or initiate an audit.
- Tax Evasion
If the taxable person does not disclose his income or intentionally tries to reduce tax liability, may lead to a VAT audit if FTA finds so.
- Incorrect issuance of tax invoices and credit notes and non-maintenance of proper supporting documents
If the taxable person fails to issue proper tax invoices to their customers as per the provisions of VAT law and does not maintain proper supporting documents, the FTA may conduct an audit to penalize for the non-compliance.
Will FTA notify before conducting a VAT Audit?
Generally, the Federal Tax Authority will not give any surprise visits and conduct VAT audits. They will inform the taxable persons in advance to be ready for the VAT audit and will ask to keep all the documents ready. FTA will give reasonable time to be prepared for the audit. If required, they may extend the time on sufficient grounds. FTA is expected to give a notice of minimum 5 working days before they visit for VAT audit.
However, FTA may instruct other government bodies to make a visit without notice to make sure the compliance with respect to issuing the tax invoices for all the transactions, the tax invoice issued are in line with the law and so on.
What are all the documents to be kept ready for VAT Audit?
- Tax invoices issued for customers
- Tax invoices received from the suppliers of goods and services
- Supporting documents for Exports and Imports
- Tax credit notes issued to customers
- Filled compiled transaction data format file provided by the FTA
- Reconciliation of revenue and expenses with VAT ledger
- General ledgers and Trial balances for the period pertaining to the audit
- Signed audited financial statements
- Legal documents of the Entity
- Bank statements for the audit period
How to be ready for the VAT audit? (VAT Health check)
- Installation of proper accounting system
The taxable person should maintain a proper accounting system which should generate tax-related transactions at any point in time. The authority will review the accounting system. Use of proper accounting software will enable you to produce proper tax invoices, credit notes, VAT returns and other types of reports.
- Maintenance of supporting documents
Under UAE VAT law, all taxable persons are required to maintain financial and accounting records for the period of the last five years after the end of the tax period to which they relate.
- Timely filing of VAT returns and payment of due tax
Businesses must ensure that VAT returns are filed before the due date of each period and paid the due tax on time.
- A system of Internal control
A taxable person should implement a proper internal control system to ensure that the provision of VAT regulations is complied. An efficient internal control system helps in the timely submission of VAT returns, reviews and reconciles the records regularly, ensures compliance and avoid penalties.
What are the audit procedures?
FTA may conduct the audit most likely in the following manner
Step 1 – Remote & Desk based
In this step, the auditor will ask the taxable person to provide the financial data, legal documents, summary of VAT returns, general ledgers and a filled transaction data list provided by the FTA and any other documents as seem fit by the tax auditor appointed by the FTA.
Step 2 – On-site (Visiting the premises)
If the auditor thinks that the data provided by the taxable person in the first step is unsatisfactory, the FTA will notify for on-site assessment. In this process, the auditor will verify the supporting documents and may ask for clarifications if required.
How Spectrum Auditing can help you with VAT audits?
We, Spectrum Auditing can assist you in getting ready for a VAT audit with the help of a dedicated team of VAT experts. We will review your transactions from the point of view of VAT laws and guide you in rectifying any non-compliance-related issues. We are happy to assist you in providing our professional services to make sure your business is complying with the provisions of the VAT law and minimize the errors and omissions so that your business is ready for any audits from the government authorities.
Being a pioneer in the field of auditing, accounting, taxation and advisory services, we ensure we keep track of all the changes that are taking place in the UAE with respect to the changes in laws, rules, regulations and keep our clients informed as well as sharing the same information through our blog section or social media handles regularly. Spectrum Auditing will guide you with the laws and regulations of UAE, be it the Value Added Tax (VAT), Economic Substance Regulations (ESR), Corporate Tax (CT), Transfer Pricing (TP), Ultimate Beneficiary Owner (UBO), Anti Money Laundering (AML), etc after reviewing your business.
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