The UAE government has already implemented VAT on the supply of taxable goods and services starting from January 01, 2018. The companies that are required to pay taxes can be audited by the Federal Tax Authority (FTA) to determine their tax compliance.
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What is a Tax FTA Audit?
A tax audit is a government’s assessment of a company about their responsibility as a taxable entity. This kind of audit is conducted by the FTA to ensure that every liability is paid and every tax due is collected and given to the government within the timeframe given. The government also assesses whether the companies are following certain responsibilities that apply to their business as per the tax laws (VAT Law, Excise Tax Law, etc.).
Detailed procedure
The FTA will check the returns and other details. There may not be a specific reason for the FTA to conduct an audit of a company. They can conduct it based on any reason or whenever they want. A notice will be issued to the company at least five days before the scheduled audit date. It will contain details such as the audit schedule, place, involved parties, reason (if anything particular), etc.
The auditor/s and the company will meet at the scheduled place at the scheduled time and the process will begin. The auditor may ask for business records, in original and/or copies, and take samples of goods and other assets as available at the place at the time.
The tax audit is required to be conducted during the official FTA working hours unless the Director-General decides to conduct the audit of business outside regular hours, in an exceptional case.
The company subject to tax audit along with its legal representatives and tax agents are required to provide full assistance to the auditors for performing their task.
If anything suspicious is found in the result of the audit that might impact the tax return, the authority may order a re-audit for further analysis.
The audited person has the right to ask for the notification copy and related documents and be present during the auditing procedures that are conducted outside of the official places.
It is the job of the FTA to review and verify the tax declarations of the tax-registered businesses. Business owners should expect FTA to inspect them in the future as part of a practice to ensure that the tax regime is working properly and being complied with by the eligible people.
What can you do to be prepared for the audit?
McLedger (formerly known as PicWPost) can help you be organized so that when your company is requested for an audit from FTA, you are all set up to face the tax audit without worrying about it. The list below shows the kinds of reviews that can be done to prepare you for an upcoming audit:
Review of the system
Since the tax has been announced to commence in the UAE on the first day of 2018, companies have ensured that every department is ready to face a new era. One of the most important items to be updated is the accounting software. The same should comply with the laws regarding VAT accounting. A review of the systems will ensure that there is no inconsistency with the recorded transactions.
Review of calculations tax
Companies must ensure that they are complying with the laws by checking that the calculation of both output and input taxes are correct. As a basic rule, the tax rate is 5% only. Any goods or services that fall under zero-rated and exempted tax should be treated as it is with documents for support.
Review of VAT returns
McLedger will review the VAT returns that need to be filed by the companies to ensure that returns will be prepared perfectly, values properly recorded in the right boxes, and the needed information is filled in. We make sure that it is filed within the timeframe provided by the FTA.
Review of payment of tax due
The correct amount of tax due should be paid on or before the due date. We will ensure that you are not drawing any negative attention from the FTA by missing the deadline for tax payment to the government.
What is FTA Audit File (FAF)?
Once the tax audit is initiated, the concerned business is required to produce all the information in a prescribed manner known as the Audit file. The format of the Audit file will be in FAF prescribed format in which all the information as required, needs to be submitted by the businesses. The FTA expects that the tax accounting software used by the business should be able to generate the Audit file in FAF format so that the businesses find it easier to respond promptly to FTA's requests.
Unlike the VAT return, which is a summary level return, meaning only the consolidated details of sales, purchase, input VAT, output VAT, etc. are declared, the audit file, designed in FAF format, needs to be produced at the invoice level. The format of the FTA audit file should be in 'comma separated value'(.csv) and should include details mentioned below:
Company Information
The FAF file should include the following details of the company, as applicable.
- Taxable Person Name (English)
- Taxable Person Name (Arabic)
- TRN Tax (Registration Number)
- Tax Agency Name
- TAN (Tax Agency Number)
- Tax Agent Name
- TAAN (Tax Agent Approval Number)
Supplier and customer details
The location of the customer and supplier i.e. the country or the Emirate (in case the country is UAE) along with TRN, if applicable, should be provided. Also, you may need to assign the tax codes, like ZR for Zero-rated supplies, to identify the nature of supply.
Transactions details
In the FAF file, you need to report the details at each invoice level. The details such as invoice number, invoice date, invoice value, VAT amount, etc. need to be captured in the audit file. The following are the transaction details you need to capture in the FTA Audit File (FAF).
- Purchase Invoices / Imports / Credit Notes/
- Sales Invoices / Credit Note
- Invoice No.
- Document number
- Permit No. - If available
- Invoice Date
- Transaction Date
- Transaction ID
- Any reference ID identifying the transaction
- Line No. - The line number of the invoice etc. (in case of multiple items in invoice etc.)
- Debit and Credit Amount - In Actual Currency and Converted to AED
- VAT Amount - In Actual Currency and Converted to AED
In the case of payment transactions, you need to capture the payment date. Apart from the above-mentioned details, you also need to capture the description of goods and services along with the VAT code, details of adjustment like journal entry and comment stating rounding off is used if the values are rounded off.
Essential advice:
- Host to audit will likely be taxable person office, or as per FTA requirements.
- Tax records, files, books of accounts and statements should be readily reachable.
- Reconcile your revenue and purchases/expenses announced in VAT returns with actual books of accounts.
