VAT Health Check is an objective evaluation of the effectiveness of a company’s VAT procedures, control methods, and documents. It is necessary to ensure that a company is compliant with the VAT law in UAE. A VAT audit can be conducted by the Federal Tax Authority (FTA) at any time without any specific reason, so companies must be transparent and accurate with their VAT returns and related statutory requirements to avoid non-compliance penalties. In this blog, we will discuss how companies can prepare for a VAT audit in the UAE.

Reconciliation of Trial Balance and VAT Returns

The value of taxable supplies is available to the FTA from the VAT returns submitted for each tax period. Therefore, the tax auditor will examine these details to ensure that any taxable revenue is included in the VAT return and that the input recovery amounts are not exceeding the actual costs incurred. Additionally, some revenue may not have been included in the VAT return or tax filing. In case corporations do not follow the procedures of periodic closing, limiting back-dated entries, and keeping reconciliation with returns, tax auditors can quickly spot discrepancies in the accounts. Reporting errors or undetected discrepancies may be viewed as taxable supplies, so it’s essential to maintain accurate records.

Export Documentation

Goods exported from the UAE are considered zero-rated if they are accompanied by official and commercial documentation, including departure certificates. However, many businesses in the UAE do not currently obtain the necessary export documentation, which may lead to non-compliance penalties. The tax authorities might not accept justifications that do not meet the VAT law’s requirement for official documentation, which includes an export document issued by the customs authority. Hence, it is crucial that businesses provide accurate documentation to comply with the zero-rating of exported goods.

Tax Policies

Tax auditors also examine if there are any discrepancies in the company’s tax treatment practices, such as standard rates reported as zero-rated or exempted, deemed supplies, or related company transactions that are not considered taxable supplies or taxable supplies that are thought to be outside the scope. Industries with varying VAT rates such as real estate, healthcare, education, transportation, and electronic services may need to evaluate the tax laws to ensure compliance.

Input Costs

Taxable persons who provide taxable supplies are eligible to deduct input related to the expenses of those supplies, subject to the condition that they possess a tax invoice and have paid or committed to pay within six months. Nevertheless, the recovery of input costs can be limited for certain expenses such as a vehicle, telephone, entertainment, and personal expenses. To determine whether the recovery of input should be refused, the tax officer will examine the expense categories and supporting evidence in the trial balance and working paper for VAT return filing.

Evidence of Payment for Expenditures

To be eligible for input recovery, the taxable entity must have either made payment for the taxable expenses or indicated their intention to do so within six months. During the audit process, the Tax Officer has the authority to demand payment proof, which may include documentation such as a receipt voucher issued by the supplier or an entry in the bank statement. Firms may occasionally claim input on expenses without paying the supplier due to various factors such as disagreements, lengthy credit terms, discounts, cash flow issues, etc. In such cases, the tax auditor may insist on reversing the VAT input.

Penalties for Non-Compliance with VAT Law

In the UAE, the VAT audit is a comprehensive task taken by the authority to monitor the registrants’ tax compliance and protect the federal government’s revenue sources. Non-compliance with the relevant laws and regulations issued by the Ministry can lead to hefty penalties.

• If a Taxable Person fails to submit a registration application within the timeframe, they can face a penalty of AED 10,000. Similarly, the failure to maintain required records can lead to a penalty of AED 10,000 for the first time and AED 20,000 in case of repetition.
• If a Registrant fails to submit the Tax Return within the time frame, they may face a penalty of AED 1,000 for the first time and AED 2,000 in case of repetition within 24 months. In case of submitting an incorrect Tax Return, a fixed penalty of AED 1,000 may be imposed for the first time and AED 2,000 in case of repetition.
• Non-compliance with the conditions and procedures related to the electronic issuance of a Tax Invoice and a Tax Credit Note may lead to a penalty of AED 2,500 per detected case for the Taxable Person.

It is essential to be transparent and precise with VAT returns and related statutory requirements to avoid non-compliance penalties. The VAT Health Check is an impartial evaluation of how well a company’s VAT procedures, documentation, and control measures are functioning in the UAE. This assessment includes an examination of VAT returns, scrutiny of pertinent business transactions, and compliance with legal requirements for tax record-keeping. To prepare for a VAT audit, businesses need to ensure compliance with key areas such as trial balance and VAT return reconciliation, proof of exporting goods documentation, tax policies, recovering input costs, and evidence of payment for expenditures.

Takeaway

In conclusion, ensuring compliance with the VAT law in the UAE is essential for businesses to avoid hefty penalties and protect the federal government’s revenue sources. The VAT Health Check provides a comprehensive assessment of a company’s VAT procedures, paperwork, and control measures to ensure compliance with the law. Key areas such as trial balance and VAT return reconciliation, export documentation, tax policies, input costs, and evidence of payment for expenditures must be carefully evaluated to prepare for a VAT audit.

With the help of professional accounting outsourcing companies in the UAE, businesses can ensure that they stay compliant with VAT, tax, accounting, bookkeeping, and auditing laws. These companies provide expert services that can help businesses focus on their core operations while maintaining transparency and accuracy with their financial records.

It is important to choose a reputable outsourcing company that has the necessary expertise and experience in the field. By doing so, businesses can ensure that they avoid hefty penalties and protect the federal government’s revenue sources. By partnering with the right outsourcing company, businesses can maintain compliance, and focus on their growth and success.

HTIC Global is one of the leading outsourcing companies in the UAE that can help businesses stay compliant with VAT, tax, accounting, bookkeeping, and auditing laws. With their expert services, businesses can focus on their core operations while maintaining transparency and accuracy with their financial record!