FTA Audits – What Should You Expect?
April 28th, 2021 / Haroon Juma / VAT Blog
Your VAT returns form a legally binding statement of your tax liabilities as a self-declared assessment, this means the preparation and accuracy is the responsibility of the taxable person.
As the VAT system settles in the UAE during 2019, the FTA is likely to increase its focus on audits. In this blog, we discuss the key questions that better answer the key questions surrounding an FTA audit.
What is a VAT Audit?
Under the Organization for Economic Co-operation and Development (OECD) guidelines, an audit is defined as:
“Examination of whether the taxpayer has correctly assessed and reported their tax liability and fulfilled other obligations.”
Under a self-assessment system, audits are considered essential to promote voluntary compliance and:
• Identify non-compliance to the Legislation
• Gather intelligence on the state of the tax system.
• Gather supply chain information (an audit on any business could trigger an audit on another business)
• Educate businesses and assist in the implementation of the law and identify areas that require may require clarification.
The tax authority will require access to accounting records, documentation, and personnel to conduct their audit.
Your business may have filed your VAT returns and in some cases received refunds without any audit procedure.
This does not necessarily mean the FTA has accepted any non-audited business as compliant. They reserve the right to audit any business for up to 5 years, hence it should be your responsibility to remain compliant and proactive to any changes to the Legislation.
When & What triggers an Audit?
An audit can be triggered by a variety of factors and may not be solely determined by the size of the business. The timing for any audit cannot be predicted, nevertheless, several criteria most likely lead to an audit:
What are the Legislative Powers?
The Legislation grants the FTA wide-ranging powers to ensure compliance is met. These powers (set out across six documents issued under the VAT Legislation) grant the FTA powers to compel businesses to full disclosure and also subject penalties for non-compliance. In terms of the specific audit procedures, the law grants:
What are The Audit Procedures?
It is likely the FTA will conduct an audit in the following manner. At each stage, the penalty assessments increase for any disclosures affecting underpaid taxes or noncompliance.
Initially, the emphasis may be on remote, desk-based audits where system data and documentation provide is the primary assessment model. If this is considered unsatisfactory, an onsite audit may occur which will require further preparation.
How Should You Prepare?
It is incumbent on the business to demonstrate compliance under audit. Nothing should be presumed, and comprehensive preparation is the key.
Under an audit the FTA will seek to establish:
- Summary understanding of your business and how it operates
- The accuracy of recording and rating your sales & purchase transactions
- How you manage your sector risks e.g. customs processes, cash risks
- Management of your supply chain and the completeness of data
- Governance, process, and controls implemented across your business
Ensuring comprehensive documentation furnished on time is advised to demonstrate sufficient controls are implemented to internal processes, systems, and personnel.
Ideally, you should test your test returns for accuracy and target areas that are easy wins under an audit. Some easy wins include:
Over recovery for VAT on purchases including blocked input claims
- Tax invoice & credit note formats
- Inaccurately accounting for foreign exchange
- Reverse charge and imports
- Deemed supplies
- Transitional supplies spanning 2017 and 2018
- Accounting reconciliations and system compliance
If you believe these errors have occurred, correcting them before any audit under voluntary disclosure will be more economical than finding out under audit. The law grants reduced penalties under self-disclosure of errors the sooner they are declared.
What Could Result From An Audit?
An audit could lead to several outcomes that range from:
- Assessment and penalties for non-compliance and underpaid taxes
- The further thorough process if additional issues are identified
If you prepare well and undertake a thorough review of your returns, your ability to manage an audit will be greatly enhanced.
Partner With SimplySolved
Serving over 200+ clients we know the challenges your business faces operating cost effective, compliant and efficient back office operations in Finance, Tax, Human Resources Management, IT and Marketing.
As an FTA Accredited Tax Agency with ISO 9001 Quality & 27001 Information Management Certification, we offer a quality-based approach to our services supported by dedicated team of certified professionals.
We support our clients with defined processes, platforms and expertise to deliver advisory, project and outsourced services in Accounting, Tax, Auditing, HRM, IT & Marketing. Our offerings are specially designed to meet the UAE Regulations to put you in control of your information, comply to the regulations and help you make better business decisions.