VAT Health Check in UAE

What is VAT Health Check?

A VAT Health Check is an independent review by an experienced VAT consultant to identify the effectiveness of the VAT procedures, documentation and control practices. A VAT Health Check includes review of VAT returns, transactional analysis of the existing transaction scenarios the company, maintenance of tax records, documentation formats (invoices & Tax credit notes), VAT compliance of the invoice received from the supplier, key compliance areas of high risk.

VAT Health Check will be conducted in line with FTA audit perspective where based on industry specifics, key auditable areas will be listed, and high focus will be placed on such areas.

Why is VAT Health Check necessary in UAE?

VAT returns have to be accurate and in full compliance with the UAE VAT laws and corresponding Executive Regulations. The Federal Tax Authority (FTA) can exercise its powers to conduct an audit of any tax registrant to ensure compliance of VAT laws and regulations.

To ensure that the tax records, procedures and reporting are in line with the UAE VAT laws, a registrant shall conduct a Tax Health Check to identify areas where compliance and controls has to be strengthened and avoid any chances of error in future.

A first-class Health Check will identify the areas where most attention is required. Corrective actions shall be mapped out to stop the non-compliance and eliminate the occurrence of any non-compliance. By conducting a proper health check a registrant can ensure improvement in compliance with VAT laws and regulations. The health check shall include a review of sale and purchase invoices, import and export reporting and documentation practice and reporting of sales at correct boxes in the return.

FTA can start an audit after informing the registrant by issuing a notice. Based on the industry in which the company is categorized and the local business practice, the registrant won’t be able to assess FTA’s area of review and to what level it will be scrutinized. The only proactive approach is to prepare oneself before the audit by conducting a Tax Health Check and ensure that compliances are followed, and effective controls are in place to identify any non-compliance in case of its occurrence.

VAT TRANSACTION ANALYSIS IN UAE

VAT rate applicability depends upon the transaction/trade executed by the registrant or potential registrant.

An analysis of the transaction scenarios and comparing the same with existing tax laws, will ensure correct tax application and avoid any chances of error and non-compliance.

Tax consultants at HLB HAMT are well versed with the UAE VAT laws and experienced at many industry verticals which will ensure accurate tax advisory on transaction scenarios.

VAT COMPLIANCE IN UAE

Quick compliance review can ensure that focus is placed on key areas of VAT implication and corrective actions can be implemented as an immediate remedial measure.

HLB HAMT Tax Consultants have expertise to conduct a quick Compliance check where based on industry and experience, they will focus on areas which are subject to frequent errors and suggest corrective action.

VAT IMPACT ANALYSIS IN UAE

Non-compliance can lead to penalties and any corrective action will also lead to administrative penalties by FTA.

For e.g. any non-compliance identified can be rectified by filing of Voluntary disclosure, however, VD filing will be subject to a penalty based on the Cabinet Decision no. 49 of 2021.

Any identification or hint of non-compliance must be followed by an immediate Impact Analysis to assess the impact on the company’s cash flow.

Frequently Asked Questions – VAT Health Check

1. What is VAT Health Check in UAE?

   VAT Health Check is a 360-degree compliance review of an entity registered with the UAE Federal Tax Authority (FTA). Alternatively, it is also termed as VAT Due Diligence, VAT Compliance Review, VAT Pre-Audit review.

   The area of compliance review includes – Administrative compliance, Transaction compliance & Documentation compliance. VAT Health Check also looks into system compliances with FTA requirements, wherever necessary.

2. What is the objective and benefit of VAT Health Check in UAE?

   The key objective of a VAT Health Check is to:

   • Ensure compliance of the UAE VAT law and corresponding regulations enacted by the FTA
   • Ensure the effectiveness of the controls implemented by a tax registered entity
   • Achieve an assurance that non-compliances are identified
   • Take corrective action and be fully compliant with UAE VAT law.
   • Prepare the company for any FTA audit and respond to FTA queries whenever required.
   • Non compliances identified before FTA review can avoid huge penalties

3. What is the process of conducting VAT Health Check in UAE?

   • Understanding the business activity carried out by the tax registered entity and corresponding system and controls implemented.
   • Conduct Administrative compliance check to confirm updation of FTA portal with renewed documents of the organization and authorized signatory, timely filing of periodic tax returns.
   • Review of transactions reported as revenue and confirm taxability applied against taxability as per UAE VAT law.
   • Review of revenue reconciliation (if any) and address the reasons of variance and confirm its correctness.
   • Review of documentation practice and ensure adequate documents are maintained to substantiate the tax applied on specific transactions
   • Verification of tax invoices issued by the entity and received from the supplier
   • Verify if import/export documents are maintained to support the tax treatment applied by the entity.

4. What is the outcome of a VAT Health Check in UAE?

   After a VAT Health Check is conducted, non-compliances will be identified and listed down for penning down the corrective actions required. Below instances of non-compliances are exemplary and not exhaustive:

   1. Wrong figures reported in the return under Standard rated sales, Exempt sales & Zero rated sales.
   2. VAT on Advances or Transitional period transactions not treated appropriately.
   3. Sales to be reported in the return considered as Out of Scope and not reported.
   4. Refund claimed under wrong returns filed.
   5. Excess input tax claimed – For e.g., VAT claimed on blocked expenses.
   6. Input VAT claimed on non-compliant supplier invoices.
   7. Imports not used for business purposes but considered under RCM adjustment.
   8. Wrong reporting of Exempt supplies thereby impacting Input Tax apportionment.

   If these errors/non-compliance are identified during VAT Health Check and corrective actions are taken immediately then it will be subject to lesser penalties as compared to IF the errors/non-compliance is identified by FTA.

5. What is the corrective action to correct the errors?

   Where the errors result into a net tax impact of more than AED 10,000 for each tax period; it must be attended with submission of Voluntary disclosures (VD). A Voluntary Disclosure must be submitted to correct all errors/non-compliances identified in each tax period. Such Voluntary Disclosure submission is subject to Fixed penalty & Percentage based penalty. To know more, please refer our FAQ on Voluntary Disclosure.

   Where the errors are subject to net tax impact of less than AED 10,000, such errors can be rectified in the next return.

6. How long does a VAT Health Check in UAE take?

   Normally, a health check can take one week and go upto 4 weeks. However, it depends on various factors viz.

   • Size of the company
   • Complexity of the transactions carried out by the entity – depending on industry or geographical presence
   • Types and number of intercompany transactions within same corporate group (not tax group)

7. Is VAT Health Check mandatory in UAE?

   VAT Health Check is not at all mandatory but highly recommended. Like a person goes to a doctor for a routine health checkups for gaining assurance that all body activities are functioning normally.

   Recently, a leading delivery service company was fined heavily by another GCC country tax authority as the tax treatment to specific transactions was incorrect. This made the company file for bankruptcy as it was not able to pay the tax obligations and the levied penalty.

   An entity must get VAT Health Check done every 2 or at most maximum 3 years to ensure that tax compliances are correctly followed, and all tax dues are properly identified and settled with the tax authority.