Value Added Tax (VAT) is an indirect tax that was introduced in the United Arab Emirates (UAE) on 1 January 2018 at a standard rate of 5%, marking its role in significant fiscal management at the federal level. VAT has a profound impact on individuals and businesses throughout the UAE, requiring them to carefully navigate the audit requirements in UAE. Therefore, to ensure a smooth and error-free VAT audit in UAE, compliant with VAT regulations, it is advisable for businesses to avail the expert services of trusted audit firms in UAE.
Audit Compliance with VAT in UAE
VAT is one of the most common types of consumption tax charged on the value added at each stage of the supply chain, which includes supplies of goods and services that are bought and sold. The introduction of VAT provides UAE with a new source of income, which contributes to diversifying the country's economy and reducing dependence on income derived from the oil sector. Ensuring audit compliance with VAT in UAE is important for several reasons:
1. Legal Requirement
First and foremost, it is essential for businesses operating in the UAE to adhere to VAT laws introduced by the United Arab Emirates as it is one of the essential audit requirements in UAE. These laws include:
- Federal decree-law No. 8 of 2017 on value-added tax
- UAE Cabinet Decision 52 of 2017 on the executive regulations of the Federal Decree Law No. (8) of 2017 on Value Added Tax
- Federal law by decree No. 13 of 2016 concerning the establishment of the Federal Tax Authority
2. Requirement of Documentation
Businesses operating in the UAE are required to keep proper documentation of their financial transactions. Documents required for VAT audits include:
- All tax credit notes and paperwork including receipts
- All tax-related documents and invoices that have been issued.
- Documents detailing purchases of goods and services when the input tax was not subtracted.
- Records of services and products exported.
- Accounts and/or tax invoices that have been amended or corrected.
- Information about imported items, customs filings, and supplier invoices
- All imports and supplies need to be documented.
- Tax bills and other documents related to the purchase of goods and services
3. Filing of VAT Returns
Businesses that have registered for VAT are required to file for VAT returns to the Federal Tax Authority (FTA) at the end of their standard tax period. The value of the supply and purchases a taxable person made during the tax period are summed up in a VAT return, which also displays VAT-due payments of the taxable persons. According to the terms of Cabinet Resolution No. 40 of 2017 on Administrative Penalties for Violations of Tax Laws in the UAE, failure to file a tax return within the allotted time frame shall subject the offender to fines.
4. Evaluation of Input VAT
One important aspect of compliance with the VAT auditing process is the evaluation of input VAT. The audit firms in the UAE scrutinize businesses that claim input tax on their purchases, which includes claiming blocked inputs or non-recoverable tax.
5. Evaluation of Output VAT
Moreover, compliance with VAT audit requirements in UAE requires businesses to compute zero-rated, exempted, and standard-rated taxes correctly in accordance with the regulations of the Federal Tax Authority. The audit firms in the UAE must evaluate the correct amount of output VAT on the taxable goods or services they supply and pay it to the Federal Tax Authority.
6. Accounting System and Software
Ensuring audit compliance with VAT in the UAE, requires taxable persons to use correct accounting software. The VAT audit firms in the UAE are required to use updated accounting systems and software that can help businesses to avoid potential risks while auditing VAT in the UAE.
7. Avoiding Penalties
Failure to comply with VAT regulations can result in substantial penalties. The Federal Tax Authority will impose the following fines on companies for VAT non-compliance:
- The penalty for failing to keep financial records is 10,000 AED.
- If the Registrant submits an incorrect tax return more than once, there will be a first-time penalty of AED 3,000 and a second-time penalty of AED 5,000.
- AED 20,000 will be assessed if the business owner fails to assist the tax auditor in their task.
- Failure to submit a VAT registration application within the time frame prescribed in the tax law would result in a fine of AED 20,000.
- In the UAE, tax violations will also result in the trade license being revoked and the complete closure of the business.
How VAT Audit Firms in UAE Can Assist
Businesses operating in the UAE are advised to seek the expert services of reputable audit firms in UAE that are well-versed with UAE VAT laws and regulations. Their expertise can be invaluable in ensuring compliance with audit requirements in UAE and combating complex VAT issues. Thus, contact us today and we shall be glad to assist you.