The role of accounting is sometimes merely taken as the medium to calculate the profit and loss of a business. However, it is more than that. The financial records of a business must be accurate in ways that are in compliance with the relevant standards, laws, and regulations. In addition to prevailing accounting standards, such as the International Financial Reporting Standards (IFRS), firms must also adhere to local laws, including the tax laws. Thus, accounting accuracy in the UAE is the major building block of a compliant business. Let’s discuss why and how accounting accuracy helps avoid the UAE regulatory penalties.
Accounting: The Backbone of Financial Compliance in the UAE
In the UAE, firms must prepare their books following the principles of IFRS. However, for tax preparation, a business needs taxable income, which is in accordance with the tax laws. This is a bit confusing. Let’s understand simply. Accounting results in accounting incomes. For tax filing, this accounting income is taken and adjusted with tax adjustments, such as deductions, reliefs, and incentives. This, in turn, results in taxable income. Thus, we understand that taxable income is dependent on accounting income. An incorrect accounting income will result in inaccurate taxable income, which will result in inaccurate tax computation. As a result, a business will face penalties. For overall financial compliance, the accounting function is the backbone.
What is Accounting Accuracy?
In simple terms, accounting accuracy refers to clean books of accounts that are free from errors and omissions. Furthermore, the accounts must adhere to accounting standards and other relevant regulations. As a checklist, accounting precision will refer to the following points:
- Accurate recording of financial data, including the tax-related transactions in the correct period.
- The transactions must be categorized and classified following the relevant accounting standards and regulations.
- The documentation supporting the financial recording must be readily available and must be kept for a specified period of time as per relevant laws.
- Firms must adhere to any updates in the relevant accounting standards and local standards and adapt accordingly.
- Present accurate financial statements on time (e.g., balance sheet, income statement).
How Can Inaccurate Accounting Lead to Regulatory Penalties?
As we know, tax calculations are dependent on accounting data; therefore, any accounting errors or mistakes will also result in errors in tax filing and computations. Therefore, penalties will be applicable from both perspectives: tax and accounting. Let’s understand some examples of the common mistakes and the related penalties.
Incorrect Revenue Recognition
If there are errors in revenue recording that result in under- or over-reporting of sales figures, this will impact the tax computations. For instance, a higher sales figure will possibly result in higher profit and thus, higher tax liability. Similarly, a lower sales figure will possibly result in lower tax liability, underreporting of tax payable. This, in turn, will result in penalties.
An AED 500 penalty applies for incorrect return submission. Additionally, you might face interest on underpaid tax liability, which is 14% per annum charged monthly. Furthermore, there might be additional penalties for repeated violations.
Poor Accounting Practices
One of the core accounting fundamentals is “timeliness.” If a business follows poor or unprofessional accounting practices, this can lead to delayed financial statements. This, in turn, will lead to a delay in tax filings. As a result, the business will face penalties: fixed and interest.
An AED 500 per month penalty applies if there is a delay in submission of the corporate tax return within the applicable timeframe. However, from the 13th month onwards, the penalty rises to AED 1000 per month. Furthermore, the business might also face interest charges on late corporate tax payments.
Lack of Documentation
An entity must have all the required documentation covering both tax and accounting matters. For instance, documents related to financial transactions, the relevant supporting documents, and so on. Furthermore, entities must also keep the documents for a specified period of time, for instance, 7 years. This is applicable for both VAT and corporate tax. For corporate tax purposes, the documents must include those that enable the tax authority to calculate the tax liability on its own.
An AED 10,000 penalty applies to the taxable person who fails to maintain proper records and information as per the corporate tax law and tax procedures law. However, if a second violation occurs within 24 months of the first, the penalty increases to AED 20,000.
Best Practices that Guarantee Accounting Accuracy
Companies must organize and plan accounting functions in such a way that avoids regulatory penalties. Every business is different, and therefore, one solution does not fit all. However, the following list of practices applies to most businesses operating in the UAE.
- Keep books updated; don’t delay the recording of data to a future date.
- Perform account reconciliations regularly.
- Align accounting and tax functions. For instance, follow the tax calendar while planning the accounting to avoid delays in tax filing and other deadlines.
- Maintain proper documentation, including physical and digital records.
- Keep updated with changes in relevant accounting standards, laws, and regulations, and apply changes accordingly.
- Strengthen internal controls to identify and prevent fraud and errors.
- Perform internal audits and reviews.
- Hire trained staff and provide on-the-job training.
- Seek professional advice, such as from CZTA.
For further information, check out our blog on the year-end accounting checklist.
Following the best practices will not only protect your business from penalties, but it will also keep your business running smoothly. It ensures the following additional benefits:
- Reduction in risk of tax disputes
- Timely readiness for year-end audit
- Better decision-making; timely availability of information results in timely decision-making.
- Better reputation
There are various other benefits of timely and accurate accounting that vary for a specific business and respective circumstances.
How Does CZTA Ensure Accounting Accuracy That Helps Avoid Regulatory Penalties?
Creative Zone Tax & Accounting has a team of qualified chartered accountants that ensures businesses maintain accurate and compliant records. We know that regulatory issues can halt a business’s core functions; therefore, we strive to keep things in order and smooth. Our team ensures:
- Accurate bookkeeping
- Tax compliance (VAT & corporate tax)
- Incorporate changes in tax rules and other regulations
- Timely filings
- Accounting and tax alignment
- Fraud and error detection and correction
- Recommendations to improve internal controls
We aim to ensure not only that businesses avoid regulatory penalties but also strengthen their overall financial system. Contact us for tailored-made solutions for your business.
Summary
Accounting accuracy is far from just numbers. It is vital for the compliance, reputation, and decision-making of a business. One of the core benefits of clean and compliant books of accounts is that they help avoid regulatory penalties. Especially in the UAE, where there is strict regulatory oversight, entities must ensure that their books are compliant. This, in turn, will protect them from hefty penalties.
Businesses in the UAE must follow best accounting practices to ensure accuracy. This will not only protect them from fines but also result in a higher reputation, fewer disputes, and an overall smooth-running business.
Creative Zone Tax & Accounting (CZTA)
If you are looking for accounting accuracy and financial compliance, the answer is CZTA. With a seasoned and well-trained team, we ensure accuracy, timeliness, and completeness of business records, complying with the UAE laws. Contact us today.
