Bookkeeping Mistakes – How They Create UAE Tax Issues

Overview

Bookkeeping mistakes not only affect financial records, but they also negatively impact tax compliance. If there is any issue with the basic building block of an organization’s financial recording system, how can we expect tax compliance? In this blog, we will discuss key information about how errors in the books can create tax problems for UAE entities.

Which Bookkeeping Mistakes are Most Likely to Create Tax Problems?

The list can be huge; however, there are some common mistakes that every business must understand and avoid. This, in turn, will reduce compliance risk and lower the risk of penalties.

• Missing Invoices

If there are incomplete invoices, there are chances of missing entries in the accounting system. Furthermore, an entity might not be able to claim input VAT without related invoices.

• Incorrect Entries

In the UAE, entities must follow the International Financial Reporting Standards (IFRS) for their bookkeeping. Recording entries incorrectly can impact the tax return and the related tax liability.

• Unreconciled Balances

Certain crucial transactions must be reconciled with external documents to confirm their completeness, correctness, and authenticity. For instance, bank transactions must be reconciled between the accounting records and bank statements. Furthermore, customers’ and suppliers’ balances should also be reconciled.

• Not Following Accrual Accounting

For most businesses, it is compulsory to follow the accrual basis of accounting rather than the cash basis. Therefore, it is important to learn the difference between the two. For instance, if you made a sale on credit, under the accrual system you have to record the sale in the books even if there is no cash received. For further guidance, contact CZTA’s accounting gurus.

• Not Differentiating between Personal vs. Business Expenses

Sometimes small businesses are not able to differentiate between personal and business expenses. For tax purposes, only expenses incurred wholly and exclusively for the business are deductible. Therefore, entities must follow the separate entity principle for accurate accounting and tax reporting.

How can Inaccurate Bookkeeping Affect VAT and Corporate Tax Filings?

Tax returns depend on the reliability of the accounting records. Therefore, inaccurate bookkeeping will result in incorrect figures for tax returns, both VAT & corporate tax.

Specifically, for VAT returns, if the sales figure is incorrect in the accounting system, it will be carried over in the VAT return. Resultantly, there will be a wrong calculation of input or output VAT. Similarly, for corporate tax submission, the first step is to calculate the taxable income. Taxable income, in simple words, is accounting income adjusted for tax adjustments. Therefore, if the accounting income is incorrect due to bookkeeping mistakes, taxable income will be incorrect too. Resultantly, the calculated tax liability will be incorrect.

Thus, for both VAT and corporate tax filings, it is important and necessary that our books are clean and made as per the IFRS. As a practical and experienced accounting firm in the UAE, we recommend businesses consult an accounting firm, such as CZTA, for their tax and accounting needs.

What Warning Signs Indicate Bookkeeping Records May Be Unreliable?

Unreliable bookkeeping can be a headache for a business in many ways. However, the good news is that there are signs of weaknesses in the books, and entities can act accordingly. Let’s highlight some of the common indications.

• Consistent irregularities between the bank statements and accounting records.
• No periodic account reconciliations.
• Inconsistent posting; for instance, an expense posted as fuel expense this month but posted as miscellaneous expense the next month.
• Missing invoices for both sales and purchases
• Unusual expense fluctuations
• Unusual expense categories
• Negative account balances
• Tax figures do not match the accounting records.
• Supporting documents not available
• Unusual accounting estimates and policies

How can Businesses Correct Bookkeeping Errors Before Filing Tax Returns?

The key to minimizing bookkeeping mistakes is to review and reconcile accounts, not just once, but periodically and regularly. An entity can follow the practices below.

• Reconcile key accounts such as bank accounts, accounts receivable, accounts payable, inventory, and so on.
• Review invoices for any missing entries and corroborate invoices and accounting entries with each other.
• Review account classifications and categorization to ensure transactions are recorded in the correct head.
• Perform in-house inventory counts and conform to the accounting records.
• Reconcile accounting records with tax returns, including the VAT records.
• Separate personal transactions from business transactions.
• Review financial statements to highlight any unusual balances.
• Archive documents properly and cross-check with the accounting records.
• Consult an accounting and tax consultant.

The list can be huge; however, the key here is “professional skepticism.” Accounting professionals practice this approach and highlight weaknesses in advance and protect businesses from any negative consequences. Contact us today to minimize your bookkeeping mistakes and continue your compliance journey.

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