Preparing Smartly for FTA VAT Audits: Start with a Health Check

Since the introduction of VAT in the UAE in 2018, businesses have become more familiar with their tax obligations. However, as we move into the eighth year of VAT implementation, there are signs that the likelihood of being audited may be on the rise.

A VAT audit isn't something to panic about—but it's something you must be prepared for. Whether you’ve received an audit notice or just want to stay ahead of the curve, being prepared is no longer optional. This article walks you through the importance of pre-audit preparation, explains how VAT audits work in the UAE, and outlines what practical steps your business should take today.

The Growing Importance of VAT Audit Readiness in the UAE

As reflected in the open data published by the Federal Tax Authority (FTA), the number of approved reconsideration requests has shown a significant upward trend—from just 133 in 2021 to over 4,000 in 2024 (see Graph 1 below).

Source:

Federal Tax Authority. Open data (2024). Retrieved May 22, 2025, from https://tax.gov.ae/en/open.data/open.data.aspx

While this data does not directly reflect the number of audits conducted by the FTA, it provides insight into the volume of reconsideration requests—which are typically errors or omissions that are encountered have been corrected. Therefore, the increasing number of such requests may reasonably be presumed as an indicator of rising audit-related activity.

This upward trend reinforces the need for businesses to remain audit-ready at all times. A VAT audit can occur regardless of whether any intentional error has been made. Unfortunately, many companies only begin reviewing their compliance status after receiving an audit notice—by which time, long-standing issues may be difficult to rectify without regulatory consequences.

Conducting a proactive VAT health check allows businesses to identify and resolve compliance risks early—minimising exposure to penalties and maintaining credibility with stakeholders, including customers, suppliers, and government authorities.

What Is a VAT Audit?

A VAT audit is a formal review by the FTA to verify whether your business is complying with VAT laws. This includes reviewing your tax returns, financial records, invoices, contracts, and transactions.

VAT audits may be:

• Random (selected by the system),
• Risk-based (triggered by unusual activity or late filing), or
• Targeted (based on complaints or observed inconsistencies).

An audit can take place at your premises, at the FTA’s offices, or even online.

How to Prepare: Conduct a Pre-Audit VAT Health Check

The most effective way to navigate a UAE VAT audit by the FTA is to prepare in advance, before an audit notice arrives. This begins with a comprehensive internal review, often referred to as a VAT health check. Think of it as a proactive internal audit of your VAT compliance, designed to detect and resolve issues before the FTA does.

A well-executed VAT health check should follow a structured methodology across four key pillars: Your VAT health check should follow a structured methodology across four main pillars:

1.     Industry Analysis

Understand how VAT is applied within your industry and ensure that your business practices are in line with sector norms and regulatory expectations.

Key steps:

·         Compare your company’s VAT treatment with prevailing industry practices.

·         Review sector-specific tax laws, guidelines, and previous filings.

·         Benchmark against peers and common FTA focus areas.

·         Identify compliance gaps and assess the impact of upcoming regulatory changes.

2.     Business Model Analysis

Examine your business model and operations to identify transactions that may pose VAT risks or require special treatment.

Key steps:

·         Analyze core business activities, revenue streams, and supporting legal documents.

·         Map transactions related to sales, expenses, supply chains, and intercompany dealings.

·         Review significant business events such as restructurings, asset disposals, and contractual changes.

3.     Review of VAT Compliance Processes

Evaluate the strength of your VAT systems, internal controls, and team awareness to ensure robust compliance.

Key steps:

·         Assess how VAT is captured in accounting records and journal entries.

·         Evaluate VAT reporting processes and document retention practices.

·         Review internal approval workflows and segregation of duties.

·         Examine staff training and awareness of VAT requirements.

·         Check for internal mechanisms to identify and resolve VAT errors.

Key focus areas:

·         Are invoices issued in accordance with UAE VAT law?

·         Are transactions accurately categorized (standard-rated, zero-rated, exempt, or out-of-scope)?

·         Are VAT returns prepared, reviewed, and submitted through a documented and controlled process?

·         Is your VAT compliance manual up to date and accessible to relevant teams?

4.     Legal Compliance Evaluation: UAE VAT Law & Executive Regulation

Perform a technical audit to assess whether your practices comply with the UAE Federal Decree-Law No. 8 of 2017 and the Executive Regulation (as amended in year 2024).

Key steps:

·         Conduct an article-by-article compliance review, including key areas such as:

o    Place of supply rules,

o    VAT rates and exemptions,

o    Reverse charge mechanism,

o    Time of supply and invoicing rules.

·         Validate whether VAT has been accurately applied across various transaction types (zero rates, exempt, out of scope, domestic, import/export, capital assets, etc.).

·         Ensure returns are filed on time and reflect actual business transactions.

FTA Portal Alignment:

·         Cross-verify data submitted to the FTA with internal accounting and ERP systems.

·         Investigate discrepancies between reported figures and actual records.

Data Testing and Validation:

·         Perform sample testing on sales, purchases, adjustments, and special cases.

·         Confirm that figures declared in VAT returns match general ledger entries, financial statements, and supporting documentation.

Document Review:

·         Ensure that all VAT-related documents (invoices, contracts, customs forms, etc.) are:

o    Stored systematically,

o    Available in the correct format (e.g., tax invoices),

o    Capable of supporting each entry on the VAT return.

Be Prepared for FTA Requests as FTA auditors often request:

·         Sales and purchase invoices,

·         Contracts for high-value or recurring transactions,

·         Import and export documentation,

·         Bank statements supporting key payments and receipts.

Having these documents well-organized, indexed, and readily accessible will significantly reduce the burden and risk during an actual audit.

A robust VAT health check helps businesses identify and correct errors before the FTA initiates an audit. This is not just about good compliance—it’s a strategic move to reduce penalty exposure. By detecting issues early, businesses can opt for voluntary disclosure, where penalties are significantly lower than those imposed following an FTA-initiated audit.

What to Expect During a VAT Audit

If selected for an FTA’s VAT audit, here’s what typically happens:

Audit Notification

You’ll receive a written notice from the FTA (unless there's a suspected serious issue, in which case they may conduct a surprise visit). The notice usually gives you 10 business days to prepare.

The Audit Itself

Auditors may visit your office or request documents electronically. They’ll examine:

• VAT returns filed over past years,
• Original records and invoices,
• Accounting entries and reconciliations,
• Goods in stock (if relevant).

You or your finance team will be expected to cooperate fully, provide documents, and explain inconsistencies if any.

After the Audit

Following the review, the FTA may issue:

• No findings, if everything is in order.
• A Tax Assessment, if they find underpaid VAT.
• An Administrative Penalty, if records were missing or compliance requirements were breached.

If you disagree with the FTA’s findings, you have the right to:

• Request a review of the assessment,
• File for reconsideration,
• Or appeal through the tax dispute resolution process.

What Business Owners Should Do Today

1. Don't wait for the FTA to reach out. Begin your own VAT health check now.
2. Assign responsibility. Identify someone in your team (or an external tax advisor) to lead the VAT audit readiness process.
3. Organize your records. Ensure all VAT documents for the last 5 years are accessible and complete.
4. Train your staff. Make sure key staff understand the basics of VAT and can explain processes during an audit.
5. Review before submission. Use a checklist approach before every VAT return filing to catch errors early.

Final Thoughts

A VAT audit in the UAE isn’t just about checking numbers—it’s a review of your business’s credibility and financial hygiene. Preparing in advance is not only smart but essential in today’s regulatory environment.

Investing time in a proper VAT health check using the process, compliance, data, and documentation review methodology will pay off—whether or not an audit comes your way.

If you’re unsure where to begin, consider getting help from a VAT specialist who can perform an independent review and guide you through best practices tailored to your industry.