The VAT Audit Process in the UAE
A VAT audit in the UAE is an essential compliance check conducted to ensure the accuracy of an individual or entity’s VAT liability. This is achieved by meticulously scrutinizing various records maintained by the taxpayer. The tax audit can take place either at the taxable person’s business premises, commonly referred to as a ‘field tax audit,’ or within the offices of the Federal Tax Authority (FTA). Typically, taxpayers receive prior notification before an audit is initiated.
In this article, we will delve into the reasons for VAT audits in the UAE and outline the key steps involved in the auditing process.
**Why Are VAT Audits Necessary?**
VAT in the UAE operates on a self-assessment basis, meaning taxpayers themselves determine the amount of tax payable and recoverable input tax based on their supplies during a given period. This self-assessment is reported to the FTA through VAT returns. To ensure the accuracy of these self-assessed declarations, the FTA employs the tax audit procedure.
During an audit, if discrepancies are identified resulting in underpayment of VAT or the improper claiming of input VAT deductions, the FTA issues an assessment notice, requiring the taxpayer to settle the VAT dues along with applicable penalties.
**Timelines for VAT Audits**
It’s important to note that not all VAT-registered businesses will undergo audits, and there is no fixed frequency for these audits. The FTA periodically selects businesses for auditing, and this decision is at their discretion. Several factors influence the selection process, including:
1. The size and complexity of the business.
2. The business’s past compliance history.
3. The tendency to submit returns late.
4. Instances of incorrect return filings, among other factors.
For instance, a large business with a history of non-compliance and substantial sales volume is more likely to undergo a tax audit, as it poses a greater risk to tax revenues than a smaller business with a strong compliance record.
**VAT Audit Procedure**
Typically, the FTA informs the taxable person about an upcoming tax audit five business days in advance. However, in exceptional cases like suspected tax evasion, or if notifying the taxpayer could hinder the audit process, no advance notice will be given.
VAT audits can be conducted either at the taxable person’s place of business or at the FTA’s office. If the audit takes place at the business premises, it will usually be during the FTA’s normal business hours.
Businesses selected for an audit, along with their tax agents or legal representatives, must cooperate and provide the necessary assistance to the tax auditor to facilitate a smooth audit process. Key actions the taxpayer should ensure upon receiving a tax audit notice include:
1. Ensuring access to relevant premises.
2. Making tax records, such as books of accounts and tax invoices, accessible for examination.
3. Ensuring relevant staff are present, including the person responsible for compiling the tax return.
4. Providing original copies of documents or invoices.
Failure to provide the required records or assistance during the audit may lead to penalties being levied on the taxpayer.
Upon completing the audit, the FTA communicates the results to the taxable person. If the audit identifies any of the following cases, a tax assessment will be issued:
1. Failure to apply for registration within the specified timeframe.
2. Failure to submit a tax return within the timeframe prescribed by the VAT Law.
3. Failure to settle the payable tax as indicated on the VAT return filed within the specified time limit.
4. Submission of an incorrect VAT return.
5. Failure to account for tax on behalf of another person when legally obligated.
6. VAT payable shortfall due to tax evasion.
Administrative penalties may also be imposed on taxpayers when audit findings align with the instances specified in the law.
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