VAT compliance

Managing costs of VAT compliance

VAT compliance

The United Arab Emirates introduced Value Added Tax on 1st January 2018.  It has now been over 18 months of implementation.  As an accounting firm, we ensure that our clients achieve full vat compliance at all times.  However, our review and interaction with various businesses providing services and availing services for VAT compliance raise a few concerns.

The VAT regulations when issued gave sufficient time to all businesses to work towards getting themselves ready for compliance.  The compliance requirements by themselves are basic and simple to comply with.

A brief view of basic compliance requirements is listed below:

  1. Maintain records of all transactions by way of Tax Invoices for buying and selling.  For buying from unregistered suppliers you still need record by way of an Invoice.
  2. Account for these records using generally accepted accounting standards.  The FTA even went to the extent of listing systems which were customized to comply with UAE VAT requirements.
  3. If eligible for registering, register, file returns, pay taxes within the stipulated time-frames.  If you become ineligible, deregister in a timely manner.

It should be noted, that prior to the VAT regulations, businesses were not mandated to maintain a proper set of accounts of their day to day transactions in a granular manner.  While this is a basic best practice to manage your business, the general practice was to consider this an unwanted cost by the small businesses.  This was the case as they were comfortable tracking their cash flows, receivables, and payable.

It is noted that even today, many small businesses adopt practices which increases their risk of non-compliance to VAT guidelines.  This is complicated by service providers who provide non-compliant quick-fix solutions in a confident manner at very low costs making it attractive to be non-compliant.

The nature of risks taken in meeting the basic compliance requirements can be summarized below:

  1. Many businesses still do not issue invoices for sales or collect invoices for expenses.  There are stipulated penalties for this violation, but businesses consider the risk as minimal as they believe they will not be caught. (global phenomena)
  2. Many businesses still do not maintain a proper book of accounts.  The costs of getting an accounting system, the cost of getting an accountant or hiring an accounting firm are primary considerations. This leads to procrastination and the need for quick-fix solutions to have the returns filed when due.   The risk here is that if accounting is not undertaken, the accuracy and completeness of the tax return cannot be assured.  Further, in case of a request for FTA Audit file at any point within 5 years, would expose the non-compliance.
  3. Tax and accounting consultants provide services for registration and return filing for a fee.  Both these activities are very simple and would not warrant a fee if proper records are kept and accounted for.  However, their services survive as businesses which do not maintain accounts approach them for return filing based on manual records of sales and purchases.   The returns to be filed are summary returns, hence a simple excel spreadsheet template is sufficient to compute the return values based on details provided, the return is filed based on these computed values.  The completeness and accuracy of the same is a big question mark.

It is time, that the small businesses wake up to the risks of non-compliance that they are undertaking.  This requires a cultural shift in the way business is run to achieve VAT compliance.  Business is for the long run and short-cuts does not support longevity.  Short term fixes address current problems by way of a band-aid and create a much bigger problem for the future which would require a significant cost to solve.

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