Conducting a Self-Audit of Your VAT Compliance

Conducting a Self-Audit of Your VAT Compliance: A UAE Guide

In the UAE’s regulated tax environment, the question is not *if* the Federal Tax Authority (FTA) will scrutinize your records, but *when*. An official tax audit can be a stressful, resource-intensive, and disruptive process. It often feels like an interrogation, where your business is placed under a microscope. But what if you could turn the tables? What if you could put your own business under that same microscope first, find the issues before the FTA does, and fix them on your own terms? This is the core purpose and power of a VAT self-audit.

A VAT self-audit, or a VAT health check, is a proactive and systematic review of your own VAT processes, transactions, and filings to assess your level of compliance with the law. It is a dress rehearsal for a real FTA audit, conducted internally. By simulating the audit process, you can uncover hidden risks, identify procedural weaknesses, quantify potential errors, and take corrective action—often by filing a voluntary disclosure—before the authorities get involved. This not only significantly reduces the risk of penalties but also strengthens your internal controls and provides invaluable peace of mind. This guide provides a step-by-step framework for conducting a thorough VAT self-audit for your UAE business.

Phase 1: Preparation and Planning – Setting the Stage for Success

A successful audit begins with a clear plan. Rushing into a review without a defined scope and the right resources will lead to an incomplete and ineffective assessment.

1. Define the Scope and Period

You need to decide what you are going to review. For a comprehensive check, it’s best to review a full financial year. For a more targeted check, you might select a single, recent VAT quarter. Within that period, you must also decide on the sampling methodology:

• Full Review: Only feasible for very small businesses.
• Risk-Based Sampling: Focus on high-value transactions and historically problematic areas.
• Random Sampling: Select a random percentage of transactions to test the overall health of the system.

2. Assemble the Team

Assign clear roles. This could be an internal team led by your finance manager or CFO. However, for an objective and expert assessment, it is highly recommended to engage an external party. A specialized firm providing VAT consultants or internal audit services will bring an unbiased perspective and deep technical knowledge that your internal team may not possess.

3. Gather the Essential Documents

Before you begin testing, compile a complete audit file for the selected period. This must include:

• All submitted VAT returns for the period.
• Detailed General Ledger reports for revenue, expenses, accounts receivable, and accounts payable.
• The VAT working file used to prepare the returns.
• A sample of sales and purchase invoices.
• Bank statements.
• Relevant contracts and agreements.

Phase 2: The Core Audit – Transactional Testing

This is where the detailed review happens. The goal is to trace the journey of your financial data from source document to the final VAT return, checking for compliance at every step.

A. Auditing Your Sales (Output VAT)

The primary risk here is under-declared VAT. Your checklist should include:

1. Revenue Reconciliation: Does the total revenue reported in your general ledger for the period match the total revenue (standard-rated + zero-rated + exempt) declared in Box 1 of your VAT returns? If not, you must prepare a detailed reconciliation explaining every variance.
2. Tax Invoice Compliance: Select a sample of sales invoices and check them against the legal requirements. Does each invoice clearly state the words “Tax Invoice”? Does it include your TRN, the customer’s TRN (if applicable), the date, a unique number, a description of goods/services, the unit price, quantity, the rate of tax, the amount payable in AED, and the exchange rate if in a foreign currency?
3. Correct VAT Rate Application: For each invoice, verify that the correct VAT rate has been applied. Pay special attention to:
   • Zero-Rated Supplies: For exports of goods, do you have the official and commercial proof of export for every single transaction claimed as zero-rated? Is it dated within 90 days of the supply?
   • Exempt Supplies: If you make exempt supplies (e.g., certain financial services), are they correctly identified and excluded from the VAT calculation?
4. Place and Time of Supply: Are you declaring VAT in the correct tax period based on the date of supply? For services, have you correctly determined the place of supply, especially for cross-border transactions?

B. Auditing Your Purchases (Input VAT)

The primary risk here is over-claimed input VAT. Your checklist should include:

1. Holding a Valid Tax Invoice: For every dirham of input tax you have claimed, can you produce a valid tax invoice addressed to your company, showing the supplier’s TRN and the VAT amount? This is the most common reason for the FTA to deny input tax claims.
2. Review of Blocked Items: Scrutinize your expense ledger. Have you incorrectly claimed input VAT on:
   • Entertainment expenses provided to non-employees?
   • Motor vehicles used for personal reasons?
   • Expenses related to exempt supplies?
3. Input Tax Apportionment: If your business makes both taxable and exempt supplies, you must conduct a detailed review of your input tax apportionment calculation. Is the method fair and reasonable? Is the calculation mathematically correct? This is a highly complex area often targeted during FTA audits. A full accounting review is often needed.
4. Reverse Charge Mechanism (RCM): For imported services and goods, have you correctly accounted for VAT under the RCM? You must declare the output tax in Box 3 and claim the input tax in Box 10 of your VAT return. Ensure both sides of the entry have been made.

Phase 3: Reporting, Remediation, and Improvement

The audit process is only useful if it leads to action.

1. Create an Audit Report

Document your findings in a clear and concise internal report. This should include:

• The scope and period of the audit.
• The methodology used (e.g., sampling).
• A list of all errors and control weaknesses identified.
• A quantification of the potential tax shortfall or overpayment, including an estimate of potential penalties.

2. Develop a Remediation Plan

If you discover errors, you must act.

• For Underpaid VAT: The correct course of action is to submit a Voluntary Disclosure to the FTA for the relevant tax periods. This allows you to correct the error and pay the outstanding tax. While penalties may still apply, they are often lower for proactive disclosures.
• For Overpaid VAT: You can claim a refund for the overpaid tax in your next VAT return.

3. Improve Internal Controls

The final step is to learn from the audit. Implement changes to your processes to prevent the same errors from happening again. This could involve staff training, updating your chart of accounts, or configuring your accounting software to automate certain checks. A system like Zoho Books can be configured with custom tax rates and rules to minimize human error.