As the UAE VAT regime matures, it is becoming increasingly imperative for businesses to tighten their compliance controls. While many companies have grown familiar with the routine of VAT return filings and tax invoice preparations, several still overlook important areas of the law that can lead to compliance risks.

The purpose of this article is to shed light on one of the most commonly ignored areas in VAT compliance: supplies that do not form part of typical sales or revenue in the financial statements, and how businesses can identify and rectify these oversights before they attract penalties during a VAT audit.

The Misconception: "VAT is Only Payable on Sales"

A recurring mistake observed during VAT audits is the assumption that VAT applies only to revenue recorded under “sales” or “turnover.” Businesses often diligently charge VAT on sales invoices and reconcile it with their revenue. However, VAT is applicable on "supplies" — not just on what is recorded as revenue in the financial statements.

This distinction is fundamental. A "supply" refers to making something available to someone, whether for consideration or not. This means that some non-revenue transactions can also be taxable supplies, such as those that fall under the deemed supply provisions.

Let’s take a real-world example. A company purchases laptops for its trading purposes and claims input VAT at the time of purchase. A few years later, one of the laptops is given to an employee for home use — free of charge. From a financial perspective, this might not be recorded as a revenue transaction. However, for VAT purposes, this is a deemed supply, and the company must charge output VAT on the fair market value of the laptop.

The issue is that this transaction:

• Is not captured in the sales GL
• Is not reflected in revenue
• May not be flagged by finance staff unless specifically checked

As a result, such transactions go undetected, and the VAT computation becomes incomplete. This is often discovered only during a VAT audit, where, if not corrected, it can lead to a re-assessment of VAT by the Federal Tax Authority, along with penalties.

The Solution: Proactive Identification of Taxable Transactions

The first line of defense in ensuring full VAT compliance is identifying taxable supplies at the transaction level before they are recorded in the accounting system. To do this:

1. Educate staff on what constitutes a supply under the law.
2. Encourage a skeptical and investigative approach — every transaction should be reviewed for possible VAT implications.
3. Avoid assuming that non-revenue items are non-taxable. Even internal transfers, gifts, or disposals can create VAT liabilities.
4. Consult with VAT professionals before entering into transactions that might involve making something available to another party, including for free.

Key Tools for Strengthening VAT Compliance

To systematically capture all taxable supplies — both typical and non-typical — VAT officers can incorporate the following reconciliation and analysis tools:

a. Turnover vs. VAT Supply Reconciliation

Each tax period, businesses should prepare a reconciliation between:

• Turnover per financial statements: Include all revenue and income streams such as product sales, service income, asset disposals, interest income, scrap sales, fair value gains, and any credit to the Profit and Loss account.
• Total supplies per VAT Return: Include standard-rated supplies, zero-rated supplies, exempt supplies, reverse charge transactions, and deemed supplies.

Key Step: Compare the two and document reasons for the differences. For example:

• VAT Supplies that are not part of revenue
• Revenue streams that are out of VAT scope (e.g., certain dividends)

This reconciliation provides a comprehensive view and is a must-do for businesses of all sizes — from small enterprises to large corporations.

b. VAT GL Reconciliation

At the end of each tax period, cross-check:

• The VAT payable or receivable as per your accounting VAT GL, and
• The net VAT position as per your VAT computation.

Any difference should be explained. Discrepancies may arise from:

• Missing supplies
• Incorrectly posted input VAT on non-recoverable expenses
• Manual adjustments for the VAT computation not reflected in accounts

c. Review of Potential Supply-Triggering GLs

Go beyond the usual sales and revenue GLs. The VAT compliance officer should review all GL accounts where a supply might have been recorded outside normal sales, such as:

• Asset disposals
• Write-offs
• Employee benefits
• Intercompany adjustments
• Gifts and promotions

By reviewing these accounts, officers can detect non-obvious supplies that need to be reported.

Final Thought.

As the UAE VAT system enters a mature phase, businesses must go beyond surface-level compliance. The real challenge lies in identifying and capturing taxable transactions that do not flow through traditional revenue channels.

The cost of missing these is high — not only in terms of penalties and interest but also the reputational risk of non-compliance. By training VAT officers, implementing thorough reconciliation routines, and applying critical analysis to all transaction flows, businesses can shield themselves from audit risks and demonstrate robust compliance.