VAT Audit in the UAE: What Businesses Should Prepare For?

“Audit” is most commonly referred to as the examination of financial statements, the year-end audit. However, there is a not-so-common audit known as the VAT audit in the UAE. The question is what it is and how businesses should prepare for it. Is there any specific date, or can it happen anytime during the year? In this blog, we understand when and how the Federal Tax Authority (FTA) can examine the VAT records and related processes, and how entities can prepare in advance.

What is a VAT Audit in the UAE?

A VAT audit is an independent review or examination by the FTA that assesses whether a business complies with the UAE VAT laws and regulations. FTA can examine invoices, tax returns, accounting records, financial statements, and other related documentation. However, during the inspection, the tax authority can request further documentation and clarifications if needed. The tax procedures law generally requires the tax authority to initiate the audit upon official notification sent to the taxable person, especially the on-site audit. Businesses must be ready on a real-time basis and must have SOPs in place for audit readiness. A typical FTA review may examine the following:

• Accounting records and internal controls
• VAT returns
• Treatment of input and output VAT in books
• VAT recovery – calculation & documents
• Zero-rated & exempt supplies, if any
• Import documentation
• Any other documentation needed

What Documents are Required for a VAT Audit?

Document maintenance is one of the prime VAT responsibilities. Not only do businesses file documents with their tax returns, but they must also maintain all relevant documents for at least 5 years. The documents should be ready and easily accessible throughout the year. So, the question is what documents the FTA can ask for during the VAT audit. It depends on the specific circumstances; however, there are certain records that every entity must maintain in real time or up-to-date.

Legal Documents

• VAT registration
• Trade license and other business incorporation documents
• Other legal documents

VAT-Related Documents

• Prior VAT returns
• Payment receipts
• Input tax calculations & documentation
• Exempt supplies & zero-rated supplies documentation
• Other VAT reports & records if needed

Accounting Records

• General ledger
• Financial statements
• Previous audit-related records, if any
• Bank statements

Sales & Purchases Records

• Sales invoices
• Purchases invoices
• Sales & Purchases contracts
• Import & export documentation
• Customs records
• Credit notes
• Debit notes

Other Documents as Requested by the Auditor

The list provided is not inclusive; it, however, provides a general guideline on how to be audit-ready. Depending on the nature of the audit and the ongoing findings, the inspector may request other records and information.

How can Businesses Prepare for an FTA VAT Audit?

Follow a simple rule: don’t prepare at the last minute; always be audit-ready. Don’t ever wait for an examination or inspection; always keep records and documents ready in a way that they support the audit process. A proactive approach will always suit the business. This is because, if there is an ongoing audit, the operations do not distract. Follow the sample checklist below to ensure ongoing compliance with the UAE VAT laws and regulations.

• Maintain updated records
• Perform periodic internal reviews
• Reconcile output VAT with sales and other relevant documents
• Reconcile input VAT with purchases and other relevant documents
• Review invoices for compliance with the VAT law
• Verify treatment of VAT for correct classification: standard-rated, zero-rated, or exempt supply.
• Verify accounting systems comply with VAT laws & regulations

Again, this list is not complete and might not be suitable for every business. However, entities can rely on it as a starting point and seek assistance from a local expert, such as CZTA.

What Common Issues are Identified During VAT Audits in the UAE?

The goal of the audit is not primarily to identify intentional errors or mistakes only. The common issues usually arise due to a lack of proper documentation and inaccurate VAT reporting. However, specific findings depend on the circumstances, nature of the business, and other reasons. Some common findings of the FTA audit may include:

• Inaccurate, noncompliant, or missing tax invoices
• Difference between submitted VAT returns and underlying accounting records
• Difference between input VAT and related documents resulting in incorrect claims
• Incorrect exempt or zero-rated VAT classification
• Inadequate VAT records
• Incorrect or suspicious VAT treatment

After the audit, the FTA can issue a report on audit findings representing any errors, weak documentation, or recommendations, or a clean report. However, the goal of every entity is to become audit-ready and maintain documents ready and accessible.

Summary

An FTA’s VAT audit generally examines whether a business complies with the UAE VAT laws and regulations. What businesses must do is to prepare themselves for a potential audit on a real-time basis. Updated records, accurate treatment and reporting, compliant documentation, and timely submissions and payments are some key VAT responsibilities. If an entity does everything timely and accurately, there is generally no compliance issue. Entities must perform internal reviews and reconciliations regularly to highlight any errors in advance and perform corrections. Furthermore, professional assistance from a reputable tax firm can also strengthen an entity’s compliance procedures and highlight inconsistencies promptly.

Creative Zone Tax & Accounting (CZTA)

As a credible tax firm, our team guides VAT compliance for our esteemed clients. This, in turn, keeps business running smoothly and free from any legal distractions. We strongly focus on building long-term compliance systems that ultimately provide benefits to core business operations. Contact us today.

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