Do I Need a VAT Audit in the UAE?

Companies in the UAE often wonder if they may face a tax audit for VAT compliance. This is an important question when setting up accounting and reporting procedures. 

This comprehensive article explains exactly when VAT audits become mandatory, tips to prepare if selected, the audit process, and potential penalties for errors. By understanding rules and risks in advance, your business can proactively manage VAT compliance.

What is a VAT Audit? 

A VAT audit essentially means the Federal Tax Authority (FTA) will extensively review your company’s records, bookkeeping, invoices and documents related to VAT. Auditors want to verify that your business:

• Has calculated VAT properly on all supplies of taxable goods and services
• Paid the correct amount of VAT to the government 
• Submitted complete and accurate VAT returns on time

The FTA conducts two main types of VAT audits:

1. Random Audits

These are unannounced broad audits. The FTA can pick any registered business for an audit at any time without specific reasons.

2. Mandatory Audits

These apply to companies that meet pre-defined VAT revenue thresholds or compliance criteria set by the FTA. Crossing those triggers a compulsory detailed tax audit.

FTA’s Rules for Mandatory VAT Audits 

The FTA has set the following VAT-related criteria in its tax procedures that require a registered business to undergo an extensive mandatory audit:

By Annual Revenue

• If your company has more than AED 150 million in gross annual revenues

By VAT Refund Size

• If your business submits a single VAT refund claim exceeding AED 1 million 

By VAT Compliance Issues 

• If you filed VAT returns late more than twice in any 12-month period
• If you conducted transactions with parties located in tax haven countries

As soon as a business crosses any thresholds, an in-depth comprehensive VAT audit becomes obligatory by law.

How Should Businesses Prepare for VAT Audits?

While some companies get picked randomly, those meeting mandatory audit criteria must be prepared. Even smaller firms can potentially get selected for a broad VAT audit.

Here are 5 crucial ways to get your business audit-ready:

1. Maintain Robust VAT Accounting Records

• Keep accurate, complete records of all revenue, expenses, sales and purchases 
• Meticulously file all VAT invoices issued and received 
• Maintain auditable trails depicting input and output VAT

2. Verify VAT Calculations

• Ensure you calculated VAT precisely on all supplies 
• Check product and service classifications match FTA’s published guides
• Confirm tax rates applied on invoices match registered business activity

3. Assign Responsibility for VAT Compliance

• Appoint specific finance employees to handle VAT reconciliation, record keeping and return filing
• Ensure timely submissions and that no errors, delays or non-compliance occur

4. Automate VAT Reporting

• Use reliable accounting software that extracts invoices automatically
• Confirms VAT rates automatically based on registered activity  
• Files VAT returns automatically to FTA portal  
• Minimizes manual errors 

5. Implement Multi-level Return Reviews

• Assign staff to check all VAT return amounts before filing
• Verify no typing errors or data entry mistakes submitted
• Add manager or partner review for additional validation

Step-by-Step VAT Audit Process  

If your organization does get issued a formal VAT audit notice, here are the 5 key phases to expect:

Stage 1: FTA Issues Audit Notice

You will receive a letter or email from the FTA stating your firm has been selected for a VAT audit. The notice outlines the audit scope, timelines, requirements and requests preliminary information.

Stage 2: FTA Requests Documents & Data

Next, the FTA sends a comprehensive list of VAT-related documents and transaction data required for audit. This includes VAT invoices, bank statements, contracts, inventory records and other information. You must provide all materials that fall within the covered audit period.

Stage 3: FTA Auditors Conduct Inspections

The assigned FTA auditors may visit your office, retail outlets or warehouses for further verification. This allows them to cross-check physical records, systems, stock items etc.

Stage 4: FTA Issues Audit Report

After thoroughly examining all submitted documents and records, the FTA auditors consolidate their findings and final decisions into an official VAT audit report. This comprehensive closing report outlines any observations, errors discovered, adjustments required and penalties to be levied.

Stage 5: Business Settles Outstanding Tax

If the VAT audit reveals instances of non-compliance like calculation errors, missing invoices or omissions in reporting, you must pay the outstanding tax amounts. Late fees, fines and penalties may apply based on audit findings and as per UAE tax procedures. Prompt settlement is important after audit.

Most Common Reasons for VAT Audit Penalties

If discrepancies, omissions or violations are uncovered in a tax audit, some common offences that attract VAT penalties include:

Incorrect VAT Calculations

• Charging wrong VAT rates on taxable goods or services 
• Under or over charging VAT due to application errors 

Errors in VAT Treatment

• Incorrectly classifying certain items as exempt, zero-rated or standard taxed
• Not adhering to VAT designations as per FTA VAT guides

Under-reporting Taxable Revenue

• Unintentional omissions of taxable income on submitted VAT returns
• Hidden sales revenues to lower VAT burden

Fake or Irregular Tax Invoices

• Issuing forged purchase invoices to illegally claim tax credits 
• Making off-book sales without capturing them on system and not issuing proper VAT invoices

Non-payment of VAT

• Not paying entire VAT amount collected from customers to FTA timely
• Consistent delays in depositing VAT

After VAT Audit – Follow-up Best Practices

Once your tax audit closes, be sure to:

• Thoroughly review the VAT audit report to identify problem areas
• Pay all additional VAT tax and proportionate penalties by deadline
• Formally appeal disputed audit decisions as per standard procedures  
• Improve internal controls and systems based on recommendations to prevent future non-compliance

Additionally, update your VAT governance with:

• Customized standard operating procedures for VAT management
• Automated accounting systems with tax audit trails 
• Independent internal VAT audits
• VAT-specific staff training 

This structures your VAT operations, reduces risk exposure, and ensures sustainable compliance as per UAE tax laws.

Conclusion 

In conclusion, VAT audits are a significant consideration for businesses operating in the UAE. The Federal Tax Authority (FTA) may conduct random audits or mandatory audits based on specific criteria. To prepare for VAT audits, businesses should maintain accurate and complete VAT accounting records, verify VAT calculations, assign responsibility for VAT compliance, automate VAT reporting processes, and implement multi-level return reviews.

If selected for a VAT audit, businesses can expect a step-by-step process that includes receiving an audit notice, providing requested documents and data, inspections by FTA auditors, issuance of an audit report, and settling any outstanding tax amounts or penalties. Common reasons for VAT audit penalties include incorrect VAT calculations, errors in VAT treatment, under-reporting of taxable revenue, fake or irregular tax invoices, and non-payment of VAT.

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