BEGINNING January 01, 2018, VAT on the supply of taxable goods and services were already in place in the UAE. To ensure tax compliance, companies that are required to pay taxes can be audited by the Federal Tax Authority (FTA). Now a year after the implementation of VAT in UAE, companies feel the crunch and challenges on VAT, some may have transitioned smoothly but issues can always arise. It’s time to get familiar with the terminology to keep up with the tax system in the UAE.
What are VAT and Tax Audit?
“Value Added Tax or VAT is a tax on the consumption or use of goods and services levied at each point of sale. VAT is a form of indirect tax and is used in more than 180 countries around the world. The end-consumer ultimately bears the cost. Businesses collect and account for the tax on behalf of the government.” (Government.ae)
On the other hand, a tax audit is basically a government’s assessment of a company about their responsibility as a taxable entity to ensure that every liability is paid and every tax due is collected and given to the government within the given timeframe. In the UAE, this kind of audit is conducted by the Federal Tax Authority (FTA).
How does tax audit work?
The FTA may perform the audit at the place of business of the person or any other place where they conduct business, store goods and keep records, or they may contact the company to bring certain documents for the purpose of the audit. In such case, a notice will be given at least five business days before the scheduled audit date. It will contain details, such as audit schedule, place, involved parties, reason (if anything particular), etc.
Once the Tax audit is initiated, the authority will check the returns and may ask for business records, original and/or copies and take samples of goods and other assets available at the premise. The Company subject to the tax audit, along with their legal representatives and tax agents, are required to provide full assistance to the auditors while performing their task. If anything suspicious is found in the result of the audit that may impact the tax return, the authority may order a re-audit for further analysis.
The audited person has the right to ask for the credentials, such as professional identification cards, from the tax auditors in order to determine their authority; ask for the notification copy and attend the auditing procedures that take place outside of the authority’s headquarters.
How do you prepare for the audit?
Review of accounting and documentation process
With the VAT implementation since the beginning of 2018, all taxable persons are required to maintain a complete set of accounts and documents as prescribed by law and to safe keep them for the next 5 years. Businesses must do accounting & documentation process review to ensure that there is no inconsistency with the recorded transactions and related documents.
Review of compliance and calculation
There are various provisions under VAT law which governs calculation and reporting of output and input VAT, it is important that companies ensure that they are complying with them by checking that the calculation of both output and input taxes are correct. As a rule, the tax rate is at 5% only, any goods or services that fall under zero-rated and exempted tax should be treated as it is with supporting documents. To ensure accuracy of VAT calculations and reporting, businesses must conduct periodic reviews in calculation and reporting of VAT.
Review of submitted VAT return
Businesses should review their filed VAT returns and make sure that all supporting documents are available with them for the audit. In the event that an error or mistake is identified subsequent to VAT filing, the taxable party has an option to rectify the contents of the VAT Return (Form 201) by using the voluntary disclosure option. One can use the form 211 (VAT voluntary disclosure form) to inform the authority and rectify the same voluntarily before the authority finds it in the tax audit, as penalties are very stiff if such errors were identified during VAT audit.
Review of payment of tax due, refund and penalties
The correct amount of tax due should be paid in the due date or even before it. Businesses should be aware of VAT payment & refund procedures and make sure that it is filed within the timeframe as per the government’s scheduling of VAT return filing bearing in mind the consequences of non-compliance. They must conduct periodic review of VAT registration status and apply for amendments (if any) within the time frame for smooth business operations and VAT filings.
VAT fines for non-registration
If a VAT eligible business in the UAE fails to register on the FTA portal within the specified timeline, they will have to pay a penalty of AED20,000. A penalty of AED10,000 shall be applicable to those registrants who fail to submit deregistration applications within the specified timeframe.
Even if you don’t find VAT that baffling, you may want to ensure that you or your organization are accounting for VAT correctly. If you want to ensure that you can deal with transactions and VAT with confidence, allow Philippine Business School to help you. We are inviting you to join in our Masterclass in VAT Compliance and FTA Audit. This course will provide a complete understanding of VAT, covering all the essentials and giving you the confidence to know that you are dealing with VAT correctly. The knowledge and awareness gained during the day will help you to avoid costly mistakes which can result in penalties.
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