Preparing for a Combined VAT & Corporate Tax Audit

Preparing for a Combined VAT & Corporate Tax Audit

The UAE’s tax landscape has matured. With both Value Added Tax (VAT) and Corporate Tax (CT) now fully established, businesses are navigating a dual system of compliance. For the Federal Tax Authority (FTA), this evolution marks a new phase of enforcement. It is no longer a question of *if* a business will be audited, but *when* and *how*. The logical and most efficient progression for the FTA is the combined tax audit—a single, comprehensive review that scrutinizes a company’s VAT and Corporate Tax positions simultaneously. This holistic approach allows auditors to connect the dots, cross-reference data, and gain a complete picture of a business’s financial health and tax integrity.

For businesses, this raises the stakes significantly. A combined audit is not merely a review of two separate tax filings; it is an in-depth examination of the entire financial ecosystem. It tests the consistency of data from the source transaction all the way to the final tax return. Discrepancies that might have gone unnoticed in a single-tax audit will be brought into sharp focus. Being prepared for this level of scrutiny is not a choice; it is a fundamental component of modern corporate governance. This guide provides a strategic framework for businesses to proactively prepare, focusing on the critical areas of reconciliation, documentation, and system readiness to face a combined audit with confidence.

Part 1: The New Audit Reality – Why a Combined Approach?

The FTA’s move towards combined audits is driven by a quest for efficiency and effectiveness. By reviewing both taxes together, the authority can deploy its resources more strategically and gain deeper insights.

The FTA’s Mindset:

• Holistic View: A combined audit provides a 360-degree view of a company’s financial activities, making it easier to spot inconsistencies.
• Data Triangulation: Auditors will compare the revenue declared in VAT returns against the revenue in the audited financial statements (the basis for CT). They will do the same for expenses and input VAT claims.
• Identifying Red Flags: Common triggers for an audit include:
  • Significant variances between VAT and CT revenue figures.
  • Consistently late or amended tax filings.
  • Large or unusual VAT refund claims.
  • Complex related-party transactions.
  • Operating in a high-risk industry (e.g., cash-intensive businesses, construction).

An FTA audit is a test of your systems and processes. The auditor’s primary assumption is that your records should tell a single, consistent story across all tax types.

Part 2: The Core Challenge – The Art and Science of Reconciliation

At the heart of any combined audit is reconciliation. You must be able to explain, with evidence, why the figures in your financial statements do not perfectly match the figures in your tax returns. Legitimate differences will exist, but they must be justifiable.

Mastering Revenue Reconciliation

This is the auditor’s starting point. The process involves creating a worksheet that bridges your accounting revenue to your VAT-reported revenue.

The Reconciliation Bridge:

1. Start with Total Revenue as per your Audited Financial Statements.
2. Add/Subtract Non-Business Income/Expenses that might be in the P&L but are not supplies for VAT (e.g., certain fines, penalties).
3. Subtract Out-of-Scope Supplies: Income that is not subject to VAT (e.g., dividends received, supplies made by a branch outside the UAE).
4. Subtract Exempt Supplies: Income from supplies that are exempt from VAT (e.g., certain financial services, sale of bare land).
5. Adjust for Timing Differences: Account for differences between the accounting accrual basis and the “date of supply” for VAT purposes.
6. The Result should perfectly match the total revenue declared across your VAT returns for the period.

Drilling Down on Expense Reconciliation

The same logic applies to expenses. Auditors will want to see that the input VAT you’ve claimed corresponds logically to the expenses recorded for Corporate Tax purposes.

• Blocked Items: Have you correctly refrained from claiming input VAT on blocked items like certain entertainment expenses, even though the expense itself is in your accounts?
• Non-Deductible CT Expenses: Conversely, have you claimed input VAT on an expense (like a client lunch) where the expense itself might be only partially deductible (e.g., 50%) for Corporate Tax? The records must be clear.
• Unregistered Suppliers: Your accounts will show payments to all suppliers, but you can only claim input VAT from those who are registered and provide valid tax invoices. This is a common point of reconciliation.

Performing these reconciliations requires meticulous account reconciliation services and robust bookkeeping.

Part 3: Fortifying Your Defenses – Documentation and Systems

If reconciliation is the theory, documentation is the proof. Without solid evidence, your reconciliation is just a story. A combined audit will test the quality and accessibility of your records.

Essential Documentation Checklist:

• Contracts and Agreements: These justify the nature and timing of revenue and expenses.
• VAT-Compliant Invoices: Both sales and purchase invoices must meet all FTA requirements.
• Proof of Export: For zero-rated sales, you need official and commercial evidence of export (e.g., customs declarations, shipping documents). This is a high-focus area.
• Fixed Asset Register: This must reconcile with asset additions in your accounts (for input VAT claims) and the depreciation calculated for CT.
• Transfer Pricing Documentation: For related-party transactions, you need a Master File, Local File, and robust benchmarking studies to prove transactions are at arm’s length. This is a cornerstone of CT compliance with direct VAT implications.
• Audited Financial Statements: The ultimate source document for your Corporate Tax return.

An accounting review can help identify gaps in your documentation before an audit begins.

The Non-Negotiable Role of Technology

For any business of scale, managing this complexity manually is courting disaster. An integrated accounting system is the single most important tool for audit readiness.

A system like Zoho Books is designed for the UAE tax environment and acts as your central compliance hub:

• Single Source of Truth: Every transaction is recorded once, ensuring the data used for VAT and CT is inherently consistent.
• Automated Tax Coding: Reduces human error in applying the correct VAT treatment to thousands of transactions.
• Digital Document Storage: Attach scanned invoices, contracts, and other documents directly to transaction entries, creating a direct audit trail.
• Reconciliation Reports: Generates the reports needed to perform VAT-to-CT reconciliations efficiently.
  

  How Excellence Accounting Services (EAS) Can Help

  Facing a combined tax audit requires specialist expertise. EAS provides end-to-end support to ensure your business is prepared, protected, and professionally represented.

  • Tax Audit Assistance & Representation: Our seasoned tax experts will manage the entire audit process on your behalf, from responding to the initial notice to negotiating with FTA auditors.
  • Pre-Audit Health Checks: We conduct a comprehensive internal audit of your VAT and CT positions to simulate an FTA review, identify risks, and recommend corrective actions before the real audit begins.
  • VAT & CT Reconciliation Services: Our team performs detailed reconciliations of your revenue and expenses, preparing the robust supporting schedules that auditors demand.
  • Expert Tax Advisory: We provide strategic advice on both UAE Corporate Tax and VAT, ensuring your underlying transactions are structured correctly from the start.
  • Representation in Case of Disputes: Should any disagreements arise from the audit, we can help you navigate the tax dispute resolution process.

  Frequently Asked Questions (FAQs)