How to Prepare for an FTA Tax Audit in the UAE
July 08, 2022
Since the implementation of the value-added tax (VAT) in the United Arab Emirates, businesses here have included paying taxes in their usual activities and standard operating procedures (SOPs).
But aside from following all VAT regulations, you have to be prepared for another process your business may undergo: a Federal Tax Authority (FTA) audit.
An FTA VAT audit is a formal check conducted by the FTA, the official government entity in the UAE that administers, collects, and enforces federal taxes.
It is a compliance check that aims to verify that an individual or organization’s VAT liability is accurate and truthful. The process also evaluates if the taxpayer is keeping up with their tax-related responsibilities and obligations.
The FTA does this by examining the taxpayer’s tax records thoroughly.
Why Does an FTA Tax Audit Take Place?
VAT is a self-assessed tax, which means you have to compute the amount of tax payable and recoverable input tax during a particular period. You report these through VAT returns to the FTA.
The FTA checks if your self-assessed declaration is correct or not through the VAT audit.
Certain factors may also trigger an FTA VAT audit. These include:
- The size of your business. This can be based on the volume and scale of your business operations.
- The type of your business. If your business is constantly subjected to customs and duty processes, refund claims, and runs primarily on cash transactions, you are more likely to undergo a tax audit.
- Supply chain. If your customer or supplier was subjected to an audit, your business might likely undergo one, too.
- Public recommendation. Your business will go through a tax audit if people outside your organization inform the FTA about your noncompliance practice.
Additionally, the FTA system can flag your business for an audit if it detects anomalies in your payments, owed taxes, and discrepancies on your returns.
How Can You Prepare for an FTA Tax Audit?
You will receive a notice from the FTA five business days in advance if your business has to go through a tax audit.
This should give you enough time to prepare for the audit.
Once you receive this notice, take these steps to prepare for the tax audit:
1. Prepare all tax- and business-related documents and records.
If you are a business owner in the UAE, you need to maintain several VAT-related records. These include:
- Tax invoices and documents pertaining to received goods and services.
- Supplies and imports records.
- Records of products and services purchased in which input tax was not deducted.
- Issued tax invoices and documents.
- Received tax credit notes and documents.
- Records of exported goods and services.
- Records of imports with customs declarations and supplier invoices.
You would also be required to prepare your payroll documents, bank reconciliations, voucher approvals, reimbursement requests, grant reporting, and other external reports.
Ensure all documents the auditors will check are organized in one place for easy access and to avoid misplacing any important ones.
2. Review your organization’s processes, systems, and documents.
Regardless of which accounting software you use and what processes you have in place, ensure you and your team review all of them thoroughly before the audit.
Check that they comply with all VAT accounting guidelines and laws. Additionally, verify that there is no inconsistency with all recorded transactions and reports.
Also, review both the output and input tax calculations to verify that they comply with the UAE VAT laws.
Ensure you follow the basic rule that states the tax rate is five percent. All goods and services that fall under exempted and zero-rated taxes should have documents for support.
3. Review your VAT returns.
Reviewing your filed VAT returns should be part of your audit and assurance process.
The VAT returns you filed are the primary basis of the FTA tax audit. Because of this, part of preparing for an audit should include reviewing all VAT returns.
Go over all filed VAT returns to identify discrepancies. If you are allowed to correct them, do so before the audit.
During the review, check if the returns are completed correctly, with all values inputted in the right boxes and all required details are filled in.
Check that all returns are filed within the timeframe provided by FTA as well.
Even if the edits or updates aren’t accepted during the audit, use the result of this review to improve your processes and be more prepared for another audit in the future.
4. Prepare your staff and premises for the tax audit.
Since you need to compile, organize, and update all tax records and documents for the audit, you need to work with your staff to do all these.
If you have an accounting team or staff handling all tax-related processes, inform and prepare them beforehand for the audit. Ensure they know the ins and outs of all your documents and procedures and can answer questions they may be asked satisfactorily.
Assign responsibilities if you have a large accounting team, particularly with updating all records and documents. This will help streamline the process, ensure all information is accurate, and make accountability easier.
Additionally, if you are scheduled for a field tax audit or the audit will take place on your business premises, you have to prepare your office for the auditors’ visit.
The tax audit process can be challenging to navigate for businesses of all sizes. But remember that you and your team don’t have to go through it alone. You can work with tax consultants to prepare well for the audit.
With the help of tax consultants, you can reduce your worries and be as prepared as you can be to go through the process.
To know more about our FTA VAT audit assistance services, send us your questions today.