Back on 1 January 2018, the Federal Tax Authority (FTA) of the UAE began to implement VAT value added tax (VAT) on the supply of goods and services. Set at a rate of 5%, this additional income for the government is used for the provision of high-quality public services, including policing, roads and transport services.
At present, a Dubai-based business must register to pay VAT if its taxable supplies and imports exceed AED 375,000 per annum. In addition, there is a voluntary threshold level of AED 187,500. Businesses in this income zone can join the scheme but will not be required to pay VAT unless they begin to exceed the upper threshold. Some services are exempt from paying VAT and have been allocated 0% tax or declared exempt. They include some (but not all) education, healthcare and real estate services.
Like all tax regimes worldwide, the scheme is mandatory for eligible businesses and is enforced through audits by the relevant tax authority. Here are 5 things that all those involved in running a Dubai business should know about tax audits.
1. What is a tax audit?
A tax audit is a thorough examination of whether a business is complying with the law and paying the correct taxes. In the UAE and Dubai, official tax audits are carried out by the FTA. Following an audit, the FTA imposes fines and penalties on organizations that are found not to be following VAT laws or paying the correct amount.
2. Is an audit mandatory in the UAE?
Registering with the FTA for VAT is mandatory for all eligible businesses. Over time, most organizations registered for VAT in the UAE will be subject to an audit by the FTA. There is no set schedule for tax audits by the FTA. They can decide to audit any business at any time, and need not have a set reason.
Laws have been granted to the FTA to complete audits at their discretion. For this reason, it is important to be ready for a potential audit at all times.
3. What happens during the audit?
When the FTA selects your business for an audit, you will be given 5 days notice. After the notice period, the following events will occur:
- Auditors will complete a full audit of your business’ tax affairs following its internal guidelines and protocols. Before the audit begins, it is within your rights to ask to see the professional identification of the auditors assigned to you.
- An audit can take place at your premises, or auditors may ask for documentation to be brought or sent to them at their office. A relevant person from the business must be present at the audit wherever it takes place.
- Auditors will ask to see your company’s financial records alongside your tax returns. Companies are required by law to extend full assistance to auditors. They may reasonably request certain business records to be able to carry out the audit.
- Following thorough checks, the FTA will issue a report. This report will detail whether laws are being complied with, list any violations, and any penalties to be paid.
- How to prepare for a tax audit
It is important to be ready for a tax audit at all times, as one can occur at any point with only a short notice period. Therefore,
- At all times, businesses should be careful to follow strict protocol when it comes to completing VAT returns. Errors in VAT returns, however small, can attract costly fines and damage to reputation.
- Organizations should take care to use accounting software that complies with the UAE’s VAT laws. A regular review of this system should take place to check for inconsistencies.
- Supporting documentation should be easily available, including that for services charged at 0% tax.
- All tax should be paid by the due date.
5. The benefits of using an auditing service in Dubai
It is recommended that Dubai businesses use professional auditing service. Qualified tax experts can take care of all matters related to tax returns and compliance with the law. Partnering with such experts can be the ideal solution for ensuring that unnecessary penalties are avoided.
Audit services in Dubai can provide the following services:
- Help in registering with the FTA.
- Assistance with the filing of VAT returns.
- Help in communications with the FTA, including during FTA audits.
- VAT ‘health checks’ and advice on how to resolve issues found.
- Review of internal VAT procedures and advice on how to improve these.
- Ongoing advisory services post review.
- Training for in-house personnel on VAT matters.
- Help with the FTA ‘Clarifications’ process, which addresses complications and confusion in the auditing process.
- Advice on cross-border issues and strategies.
With matters relating to tax audits, it is essential that businesses are fully prepared. Knowledge of laws should be up-to-date, paperwork must be correct and readily available. Many businesses find that enlisting professional help from audit services is the least stressful and most cost-effective way of ensuring compliance with VAT laws in the UAE.