VAT Audit in the UAE: Prepare Yourself
A VAT audit in the UAE is conducted by the Federal Tax Authority (FTA) to examine the commercial records of businesses. It can occur at the business premises or the FTA’s offices, usually with prior notice. Taxpayers and their representatives must cooperate with FTA auditors. This audit is essential for verifying VAT liability, ensuring compliance with UAE VAT and Tax Procedures Laws, and confirming the settlement of outstanding taxes.
VAT Compliance Assurance
Why is a VAT Audit Necessary?
VAT operates on a self-assessment basis, meaning taxpayers are responsible for determining the correct amount of tax payable and recoverable input tax based on their business transactions during a specific period. To verify the accuracy of self-assessed declarations, the FTA employs tax audit procedures.
VAT Audit serve as a means to assess whether businesses are correctly fulfilling their VAT obligations and adhering to the law, ultimately contributing to a fair and equitable tax environment for all parties involved.
During an audit, if discrepancies are identified that result in underpayment of VAT or over-claiming of input VAT deductions, the FTA issues an assessment notice, demanding payment of the outstanding VAT along with associated penalties.
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Purpose of VAT Audit
- The primary purpose of a VAT audit in the UAE is to verify the accuracy and completeness of a business's financial records, tax returns, and compliance with VAT laws.
- The audit aims to ensure that businesses are correctly charging and collecting VAT on their taxable supplies and that they are also claiming appropriate input VAT credits.
Who Conducts VAT Audits
The Federal Tax Authority (FTA) in the United Arab Emirates is the principal governmental body responsible for administering and enforcing the Value Added Tax (VAT) system. It plays a pivotal role in ensuring that businesses in the UAE adhere to VAT laws and regulations. VAT audits in the UAE are typically conducted by the Federal Tax Authority (FTA). The FTA is responsible for overseeing VAT compliance and enforcement. These audits can take the form of desk audits (remote reviews) or field audits (physical inspections).
Frequency of VAT Audits
- The FTA can select businesses for VAT audits at their discretion. Audits may be conducted on a random basis or triggered by specific risk factors such as inconsistent returns, large refund claims, or other anomalies.
- Some businesses may be audited annually, while others may be subject to less frequent audits.
Rights & Powers of FTA Tax Auditors in the UAE
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VAT Audit Procedure
Types of VAT Audits
Records to be maintained for a VAT Audit
- Records of all supplies and imports of goods and services.
- All tax invoices and related documents for goods or services received.
- All tax credit notes and related documents received.
- All tax invoices and related documents issued.
- All tax credit notes and related documents issued.
- Records of goods and services that have been disposed of or used for non-business purposes, including the taxes paid.
- Records of goods and services purchased for which input tax was not deducted.
- Records of exported goods and services.
- Records of adjustments or corrections made to accounts or tax invoices.
- Records of any taxable supplies made or received, including any declarations provided or received concerning these supplies.
Additionally, a tax record should detail the following:
- Tax due on taxable supplies.
- Tax due on supplies where tax is payable through reverse charge.
- Tax due after correcting errors or adjustments.
- Recoverable input tax on inward supplies or imports.
- Recoverable input tax after correcting errors or adjustments.
The Penalties Correlated with VAT Audit in the UAE
Non-compliance with tax laws in the UAE may result in various penalties, which have been specified by the Ministry of Finance (MOF). These penalties include:
The failure of the Person conducting Business to keep the required records and other information specified in the Tax Procedures Law and the Tax Law. | AED 10,000Â for the first time. AED 20,000Â in case of repetition. |
The failure of the Person conducting Business to submit the data, records, and documents related to Tax in Arabic to the Authority when requested | AED 20,000 |
The submittal of an incorrect Tax Return by the Registrant. | Fixed penalty shall be applied: AED 1,000Â for the first time. AED 2,000Â in case of repetition. |
The failure of the Person conducting Business to facilitate the work of the Tax Auditor in violation of the provisions of Article 21 of the Tax Procedures Law. | AED 20,000 |
The failure of the Taxable Person to issue a Tax Invoice/ Tax Credit Note or the alternative document when making any supply. | AED 2,500Â for each detected case. |
The failure of the Taxable Person to display prices inclusive of Tax | AED 5,000 |
The failure of the Taxable Person to comply with the conditions and procedures regarding the issuance of a Tax Invoice and a Tax Credit Note electronically. | AED 2,500Â for each detected case. |
A Person not accounting for any Tax that may be due on the import of goods as per the Tax Law. | 50%Â of unpaid or undeclared Tax. |
The failure of the Person/Taxpayer to voluntarily disclose an error in the Tax Return, Tax Assessment, or refund application pursuant to Article 10 (1) and 10(2) of the Tax Procedures Law before being notified by the Authority that it will be subject to a Tax Audit. | (1) A penalty of 50% on the amount of error. (2) A penalty of 4% for every month or part of the month, of the following: a. The unpaid Tax to the Authority, from the date the payment is due for the relevant Tax Period until the date of receipt of the Tax Assessment. b. The Tax that was not returned to the Authority due to ineligible refund, from the date of Tax refund until the date of receipt of the Tax Assessment. |
The submittal of a Voluntary Disclosure by the Person/Taxpayer on errors in the Tax Return, Tax Assessment or refund application pursuant to Article 10(1) and 10(2) of the Tax Procedures Law. | (1)Â 5% on the difference, where the Voluntary Disclosure is submitted within one year from the due date of submission of the Tax Return, the Tax Assessment, or the relevant refund application; (2)Â 10% on the difference, where the Voluntary Disclosure is submitted within the second year following the due date of submission of the Tax Return, the Tax Assessment, or the relevant refund application; (3)Â 20% on the difference, where the Voluntary Disclosure is submitted within the third year (4)Â 30% on the difference, where the Voluntary Disclosure is submitted within the fourth year (5)Â 40% on the difference, where the Voluntary Disclosure is submitted after the fourth year |