How to Audit VAT Returns in UAE?

The VAT returns audit will be conducted at the offices of the chosen business or a place decided by the Federal Tax Authority (FTA). The FTA will notify the business at least five business days regarding the audit. It will be conducted during official working hours. The audit is not compulsory for all businesses registered under VAT. However, FTA will select the companies for the audit based on certain factors. This article explains to you the concept, factors, and procedure of the VAT returns audit. 

Get expert help from Filings.ae to file VAT returns properly for a smooth tax audit process!!

What is VAT Returns Audit in UAE?

VAT return audits are official examinations conducted by the UAE's Federal Tax Authority (FTA). These audits assess a company's VAT calculations, records, and reporting practices for a specific period. The primary objectives of a VAT return audit in the UAE include:

• Verifying VAT Accuracy: Audits confirm the accuracy of a company's VAT calculations and reporting to ensure correct remittance of VAT to the government.
• Identifying Errors and Omissions: Identifying errors or omissions made in recording VAT transactions safeguards against potential penalties for non-compliance.
• Validating Documentation: Auditors assess the validity of supporting documentation for VAT calculations, such as tax invoices, purchase orders, and import declarations.
• Detecting Fraudulent Activities: Audits aim to identify intentional VAT evasion or fraud perpetrated by businesses.

What are the Factors determining Tax Audit?

It is FTA's decision to choose the business for tax audit. The following factors will be considered when selecting the business for VAT returns audit in UAE,

• Large scale businesses
• Business with late tax submissions
• Incorrect tax filings
• Complexity of a Business
• Not submitting the proper VAT returns

Tax Audit under VAT Procedure in UAE

VAT return audits in the UAE typically follow a standardised process:

• Selection for Audit: The FTA selects companies for VAT return audits based on various criteria. This may include risk assessment based on industry sector, historical compliance record, complexity of VAT activities, or discrepancies identified in submitted returns.
• Notification of Audit: The FTA issues a formal notification before the 5 business days of the designated schedule to the company informing them of the selection for a VAT return audit. 
• Data Gathering: The auditor, whether internal FTA staff or an appointed external auditor, will request access to the company's VAT records and supporting documentation. These documents may include:
  • Tax Registration Certificate (TRC)
  • Tax Invoices (Sales and Purchases)
  • Purchase Orders
  • Import and Export Declarations (if applicable)
  • Financial Statements (Profit & Loss, Balance Sheet, Cash Flow)
  • Accounting Records
  • Contracts and Agreements (relevant to VAT treatment)
  • Credit and Debit Notes
• Review and Analysis: The auditor will meticulously review the provided records to verify the accuracy of the following:
  • VAT Calculations: Ensure that the calculations for output VAT (on sales) and input VAT (on purchases) are correct according to UAE VAT regulations.
  • Record Keeping: Assessing the company's record-keeping practices for VAT-related documents to ensure proper organisation, completeness, and accessibility.
  • Supporting Documentation: Validating the authenticity and completeness of invoices, purchase orders, and other documents used to support VAT calculations.
  • Compliance with Regulations: Verifying the company's adherence to UAE VAT regulations and guidelines.

• Audit Communication and Outcomes: Upon completing the audit, the FTA communicates the results to the taxable person. These results may lead to a tax assessment if the audit identifies any of the following:
  • Failing to Register for VAT: Not registering within the timeframe specified by the VAT Law.
  • Late or Non-Filing of VAT Returns: Failing to submit a tax return within the timeframe specified by the VAT Law.
  • Late VAT Payment: Failure to settle the tax payable stated on the submitted VAT return within the time limit specified by the Tax Law.
  • Incorrect VAT Returns: Submitting a VAT return containing errors or miscalculations.
  • Failing to Account for Tax on Behalf of Others: Not accounting for tax on behalf of another person when obligated to do so under the Tax Law.
  • VAT Shortfall: A shortfall in VAT payable due to tax evasion.
  • Administrative Penalties: In addition to potential tax assessments, the FTA may levy administrative penalties on taxpayers if the audit findings fall under specific instances outlined in the law.

Note: This is the standard process, which might change from company to company. If the officials are unsatisfied with the tax audit, the process can be elaborated.

How to Prepare for Tax Audit under UAE VAT returns?

Here is the brief process to prepare for the UAE VAT returns audit and ensure a smooth tax audit process:

1. System Review:

• Ensure your accounting software complies with UAE VAT accounting regulations.
• Conduct a system review to identify and rectify inconsistencies in recorded transactions.

2. Tax Calculation Review:

• Verify the accuracy of both output and input tax calculations, adhering to the standard 5% VAT rate.
• Correctly categorize zero-rated and exempt goods and services, with supporting documentation.

3. VAT Return Review:

• Engage a tax consultant to review VAT return preparation, ensuring proper value recording and timely filing within the FTA's timeframe.

4. Tax Payment Review:

• Guarantee timely payment of tax dues to avoid penalties and negative attention from the FTA.

5. Record-Keeping Practices:

• Maintain comprehensive records as outlined in Article (78) of the Federal Decree-Law. These include,
  • Supply and import records (goods & services)
  • Tax invoices (issued & received) & alternative documents
  • Tax credit notes (issued & received)
  • Records of non-business goods/service use & related taxes paid
  • Records of purchases with non-deductible input tax
  • Export records (goods & services)
  • Records of account/tax invoice adjustments and corrections
  • Import details (customs declarations & supplier invoices)

Note: This list is not exhaustive. The FTA may request additional documents during the audit to assess your tax obligations.

Conclusion

In conclusion, VAT return audits in the UAE are necessary to ensure businesses comply with VAT regulations. The FTA selects companies for audits based on various factors and follows a standardised procedure. Businesses can improve their preparedness for a VAT return audit by reviewing their systems, tax calculations, VAT returns, tax payments, and record-keeping practices. By maintaining accurate records and adhering to UAE VAT regulations, businesses can minimise the risk of errors or penalties during an audit.

Filings.ae helps you with UAE VAT return filing & avoid penalties and non-compliance!!