What are the challenges of VAT?
Value Added Tax in UAE is one of the simplest forms around the globe. The authority has published many guides and clarifications regarding the VAT and treatment of different supplies. Still, there can be challenges for businesses while dealing with VAT compliances. This article, let us understand the common VAT compliance challenges faced by businesses in the UAE
a) Errors in VAT Return Filing
VAT liability is calculated based on the total VAT collected from the customers (Output Tax) and total VAT paid towards purchases/ expenses (Input Tax). The difference between the output tax and input tax is either the payable or receivable VAT position. It is crucial to know the right VAT treatment to arrive at the correct VAT transactions in order to submit the VAT returns without errors.
A few common mistakes are as below;
- Classification of goods or services – While selling goods or services, the VAT treatment may differ. Example:- If the goods are sold by a UAE company and at the time of sales, if the goods are outside UAE and the movement of goods is from outside UAE to outside UAE, such transactions are considered as outside the scope of VAT and do not require to include while submitting the VAT return. On the other hand, if the UAE Company provides services to a foreign client, the VAT treatment may be classified as zero-rated which is required to be included in the VAT report.
- Zero-rated and exempted supplies – Practically, in both supplies, there is no VAT payment liability. However, while reporting the zero-rated and exempt supplies required to be reported separately. Also, the input tax can be recovered on zero-rated supplies whereas the input recoverability is blocked in the case of exempt supplies. Example: - Supply of residential accommodation is exempted from VAT whereas the first supply of residential accommodation is considered as Zero-rated for VAT purposes.
- Input and output tax reconciliation - Doing the correct reconciliation between input tax and output tax is very crucial. Especially for a business that has multiple supplies (standard-rated, zero-rated, exempt and out-of-scope supplies) reconciling the output tax and adjusting the eligible input tax to arrive at the VAT liability can be the most testing point in VAT reporting.
Keep in mind that errors in VAT return filings can end up with hefty administrative penalties.
b) VAT Refund Issues
Businesses can claim back the VAT refund they paid on purchases related to taxable supplies. They need to submit a VAT refund application to the FTA. For this, the required information includes details of expenses and Input VAT as well as tax invoices. The FTA reviews the refund claim and the amount approved will be transferred to the applicant’s bank account. Usually, a refund takes 20 business days but there can be a delay if some other verification is required.
Some common issues related to VAT refunds:
- Missing invoices or receipts: The documentation is the most important element in filing VAT and if any of the details are missed then it could lead to a delay in the refund.
- Mentioning inaccurate bank account details to FTA: While requesting a VAT refund, businesses must provide accurate bank account details to the Federal Tax Authority (FTA). Providing incorrect bank details can lead to several issues like delays or declining the processing of VAT refunds. To overcome such situations, one should cross-verify the details before submitting them to FTA.
- Failed to explain refund claims during FTA inquiry: Claiming the VAT refund may be subject to review or audit. So, businesses or individuals must provide evidence that the claimed refund is a valid business expense or input VAT. If failed to justify the claim then they may face several consequences like refund claim rejection, penalties for non-compliance or an audit from FTA.
c) Lack of Proper Record-Keeping
There are several laws related to VAT compliance and one of the most important regulations is keeping the records of transactions for at least 5 years. Failure to maintain accurate and sorted records can result in difficulties like non-compliance issues and penalties.
Proper record-keeping ensures compliance and also increases business efficiency and financial transparency.
d) Navigating Regulatory Updates
It is very crucial for businesses to stay updated with the UAE regulatory changes to be compliant and competitive. Laws and regulations related to VAT may change regularly. It is difficult for businesses or individuals to understand the new guidelines, so they need an expert who can interpret and guide them eventually. The changes can involve changes in tax rates, amendments in filing procedures, or new requirements for tax invoices.
Businesses should keep them updated about the changes in the VAT laws and can also engage experts to help them stay compliant.
e) Penalties for Non-Compliance
The FTA imposes strict regulations for businesses to have complied with VAT laws otherwise there will be huge penalties associated with non-compliance. For example: late VAT registrations, late submissions of VAT returns, incorrect fillings or failure to pay VAT dues on time, incorrect VAT refund claims etc.
There are some key points that can save the businesses from the penalties-
- Monitoring updates and deadlines
- Maintain VAT invoices, receipts and transaction records up to date
- Provide accurate details to FTA during audits or inspection
- Engage tax agency to stay compliant with updated VAT regulations
2. How a VAT Tax Agency Can Help
A VAT tax agency can provide expert guidance to businesses for VAT compliance. The core idea is to minimize risk and focus on fundamental operations. How to do it:
a) Ensuring Accurate VAT Return Filing
The experts at the VAT tax agency are professional enough to file VAT returns accurately, minimizing the possibility of errors and associated penalties. The services include preparing and submitting the VAT returns on time and also ensuring accuracy in describing input VAT and output VAT, minimizing errors and associated penalties.
b) VAT Refund Management
VAT tax agency helps businesses to navigate the VAT refund process. They assist with claiming the accurate VAT refund amount and submitting the necessary documents. The agency also addresses the justification for refund claims required from FTA, reducing the risk of rejection.
In this way, businesses can save time and ensure they recover entitled amounts without delay.
c) Streamlining Record-Keeping
It is mandatory to maintain records efficiently and accurately for VAT compliance. Tax agencies help businesses to keep their records organized and as per FTA requirements. This way they save time, reduce errors and ensure that they are prepared for audits or inspections by the Federal Tax Authority (FTA).
A few record requirements include-
- VAT invoices
- Bank statements
- Import and export records and custom documents
- Contracts and agreements
- Credit and Debit notes
Businesses should classify the transactions as per the standard rated, zero-rated and exempt supplies, which will help in filing and audits. They should adopt digital organization of invoices and receipts for easy access at the time of audit or inspection.
d) Amendments in Regulations
It is very important for every business to stay updated about the new guidelines set by FTA to ensure compliance and avoid unnecessary penalties. Consult a VAT tax agency to get support in order to stay compliant with new regulations.
e) Minimizing Penalties
Businesses can avoid penalties by staying compliant and this will also help in maintaining smooth operations, financial health and business credibility.
A few strategies to be followed-
- Register on time
- VAT returns filed timely
- Records maintained accurately
- Avoiding errors while filing
- Respond to FTA queries as and when asked
3. Why Choose a VAT Tax Agency?
Partnering with a VAT tax agency can be a good decision for any business, as the agent always keeps them updated with new amendments set by FTA and all the necessities that need to be followed to stay compliant. An expert knows how to streamline all the documents and maintain accuracy while filing. They also ensure maximum VAT refunds, at the same time minimizing the penalties.
The VAT Tax agency also acts as a mediator between a business and FTA, ensuring clear communication and effective resolution of any queries.
Conclusion
Engaging a VAT tax agency could be an investment in compliance, operational efficiency and business growth.
At Flying Colour Tax Consultant LLC, we specialize in providing services like VAT registration, return filing, VAT refund processing, accounting and bookkeeping, audit support and many more. Our experienced team could be a backbone for your business in terms of VAT compliance..
To learn more about Common VAT Compliance Challenges, book a free consultation with one of the Flyingcolour team advisors.
Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.