Are you Prepared for the VAT Audit? Tips for a Stress-Free Compliance
All transactions must be recorded with complete information, including TRN, invoice number, customs declarations, revenue and expense figures, along with the corresponding VAT amounts.
Several entities mistakenly consolidate various transactions and document them as a single line item.
Since January 2018, there has been constant talk about the eventual occurrence of VAT audits. However, following the introduction of Corporate Tax in January 2022, attention swiftly shifted from VAT to Corporate Tax. Various CFOs/Tax Heads overlooked certain amendments in the VAT Law in December 2022, granting the Federal Tax Authority the authority to audit a taxpayer for an extended period of four years if the audit notice is issued before the conclusion of the fifth year.
As a result of the extension of the limitation window, many taxpayers are receiving VAT audit notices.
Depending on the complexities, revenue, size, and industry, taxpayers are being issued one of three types of notices:
- Covering all tax periods from January 2018 to December 2020
- Covering all tax periods from January 2018 to December 2018
- Encompassing a sample tax period between January 2018 and December 2020
The audit notification includes a questionnaire that covers fundamental details such as accounting system information, tax advisor details, supplies provided on a free-of-charge basis, bad debts, etc.
Additionally, a transaction data template is provided to capture comprehensive line item details related to supplies (both local and exports), procurements (both local and imports), out-of-scope supplies, etc.
All transactions must be recorded with complete information, including TRN, invoice number, customs declarations, revenue and expense figures, along with the corresponding VAT amounts.
Many entities commonly make the error of consolidating multiple transactions into a single line item, particularly with petty cash expenses. This recording method is incorrect from a VAT perspective.
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VAT Ledgers
Alongside detailed transaction-wise information, submissions must include financials, trial balance reconciliations, group structures, and revenue listings. Another common mistake involves preparing a reconciliation solely for the VAT ledgers. In addition to the ledgers, details of the revenue declared in the financials must be provided.
The purpose is to assess whether the revenues recorded in the VAT return align with those in the financial records.
If discrepancies arise, reconciliations are necessary, involving the segregation of accrued revenue, out-of-scope income, etc., from the amounts disclosed in the VAT return. This substantial task is required for each tax period, ultimately aligning with the audited financials.
In the case of VAT-grouped TRN, this activity must be extended for each taxable entity. The accurate reporting of revenue not only affects the output tax liability but also influences the input tax apportionment for each tax period.
It’s worth noting that, in addition to requesting general information, the FTA is seeking industry-specific details. For instance, a taxpayer involved in real estate is asked to provide beneficial ownership details of infrastructure projects, a list of owned land, ongoing development projects, and details on off-plan units sold.
This information aids the tax auditor in analyzing transactions and the associated tax treatments.
For example, a situation might arise where one entity owns the land, while another entity is responsible for constructing infrastructure on that land. The second entity may be recovering input VAT on construction expenses, leading to complexities such as deemed supply from one entity to another or determining ownership of the infrastructure.
Corresponding Tax Implications
Another consideration is whether the initial supply occurred within three years of the completion date, introducing corresponding tax implications.
The concept of the completion date itself is a separate topic for discussion. Lastly, debates persist over scenarios in which entities operate as disclosed or undisclosed agents. All these situations result in varied tax treatments with retrospective implications.
The FTA has consistently encouraged taxpayers to rectify past errors and ensure tax compliance. It has released over 100 public documents to offer guidance on various tax issues and aid taxpayers.
However, during a review, certain scenarios may arise that necessitate additional clarification. In such instances, taxpayers should prepare a position paper to request private clarification from the FTA.
This serves as another avenue for taxpayers to seek the FTA’s insights on a specific transaction. On average, the process of obtaining private clarification may take approximately 1-2 months in total, so it’s important to consider this timeframe when preparing for it.
The penalties for Voluntary Disclosures underwent a significant reduction (from approximately 300% to about 50%), contingent upon the year in which the error occurred.
Nevertheless, if the correction is made after the issuance of the audit notice, a higher penalty (up to 200%) might be enforced. The aim is to emphasize that taxpayers should prioritize careful attention to tax compliance and governance, rectifying any errors promptly. In cases of delay, the advantage of reduced penalties may not be applicable.
All the details specified in the notice need to be supplied within a span of 10 working days. Given the significant risk of penalties and the restricted timeframe for data submission, it is crucial for taxpayers to promptly evaluate their preparedness.
This involves identifying potential risks, rectifying previous mistakes, emphasizing thorough documentation and data management, and ultimately ensuring readiness for the VAT audit.
The information provided herein is for the general information of the user and is provided in good faith. We make no representation or provide warranty of any kind, express or implied, regarding the adequacy, suitability, validity, or completeness of the information. Our advice in regard to UAE corporate tax and value added tax is based on our understanding of the relevant laws and the regulations issued. We cannot be held responsible for new regulations and/or interpretation of existing regulations by the FTA that is not consistent with our advice. Under no circumstance shall we have any liability to any user of this information or to third parties for any loss or damage of any kind incurred as a result of the use or reliance of this information.