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Indirect Tax

FTA VAT Audit 2024: Step by Step Guidance for ensuring Compliance and Avoiding Penalties

April 16, 2024

With the mandatory tax audits approaching in 2024, UAE businesses must gear up to face the scrutiny of the Federal Tax Authority (FTA). Compliance with VAT laws and regulations is essential, as the FTA holds the legal right to conduct tax audits to ensure adherence to relevant provisions. Contrary to the misconception that VAT return filing concludes compliance, it is only the first step towards preparing for a tax audit. This blog post outlines key areas businesses should review and optimize to be audit-ready and mitigate potential risks.

Understanding FTA VAT Audits: Gain insights into the purpose and scope of FTA VAT audits, including the areas of focus and potential consequences of non-compliance.

Internal Controls Assessment: Evaluate your internal control systems to identify any weaknesses or gaps that may be flagged during the audit process, and implement corrective measures as needed.

Mock Audit Simulation: Conduct a mock audit exercise internally or with the assistance of professional advisors to simulate the audit experience and identify areas for improvement.

Staff Training and Awareness: Provide comprehensive training to relevant staff members on VAT regulations and compliance requirements to foster a culture of awareness and diligence within your organization.

Pre-Audit Preparation: Learn how to conduct a thorough review of your VAT records, ensuring accuracy and completeness to preemptively address any discrepancies.

Comprehensive Review of VAT Returns: Accuracy is Key

  1. Verify Standard-Rated Taxable Supplies: Ensure all standard-rated taxable supplies are charged at the appropriate tax rate.
  2. Zero-Rated Supplies: Verify that only eligible zero-rated supplies are correctly charged and supported by proper documentation.
  3. Reverse Charge Mechanism: Confirm that services imported from outside the UAE are recorded under the Reverse Charge Mechanism, and only eligible input credits are claimed.

Handling Exempted Supplies and Mixed Supplies

  1. Exempted Supplies: Properly account for exempted supplies and ensure accurate reporting.
  2. Mixed Supplies: For businesses dealing with mixed supplies (exempted and zero-rated/standard-rated), calculate input credits as per the prescribed formula under the law.

Import Compliance

  1. Reverse Charge Mechanism on Imports: Ensure goods imported into the UAE through UAE customs are correctly recorded under the Reverse Charge Mechanism.
  2. Reconciliation with Accounting Data: Reconcile the FTA records' import values and output liabilities with the records in the books of accounts.

Proper Documentation and Record-Keeping

  1. Eligible Input Credits: Claim only eligible input credits on purchases and expenses.
  2. Compliance with Record-Keeping Requirements: Maintain proper tax invoices, tax credit notes, Custom Bill of Entries, and Custom Bill of Exits.

Open Communication with FTA: Maintain transparent and open communication with the FTA auditors, promptly addressing any queries or requests for information to facilitate a smooth audit process.

How MBG can Help: A VAT Audit-Review conducted by MBG, a Registered Tax Agency approved by the FTA, can help businesses identify errors, omissions, and potential issues in VAT returns. This proactive approach minimizes the risk of fines and penalties in case of an FTA Tax Assessment. Our experienced tax professionals provide comprehensive tax health checks, addressing taxation and related internal controls, to ensure that clients are well-prepared before an audit takes place.

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