Tax Planning: More than Compliance

The tax system in the UAE might be simpler than many jurisdictions, but it is changing and developing very quickly. A quick look at the Federal Tax Authority (FTA) website will reveal the quantity of new laws and official guidance that has been issued in the past twelve months.

Some of these changes are industry specific, such as the new reporting requirement for certain e-commerce businesses to determine which emirate their services are received in and report their sales (in the VAT return) on an emirate-by-emirate basis. Others are more general, such as the change to the voluntary disclosure rules that now require all errors in VAT returns to be notified to the FTA by means of voluntary disclosure. Previously, voluntary disclosure was required only when the error exceeded AED 10,000. This threshold has now been removed so that even the smallest errors must be disclosed.

Any change can make a difference to the way tax is collected and administered, and if something important is missed, it can mean misdeclarations and errors, which in turn can lead to penalties and late payment charges. Therefore, 'it's essential for taxpayers to ensure they keep up to date with laws and regulations. Fortunately, there are plenty of resources to help. Most importantly is the FTA itself. The FTA publishes all of the changes and provides updates through public clarifications and guidance notes to cover important issues. The FTA also provides excellent webcasts and seminars from time to time. In addition to the FTA, there are also commercial sources – including 'BDO's website where you will find updates, articles, podcasts and a range of other resources. 

It's critical that 'SME's take advantages of these sources. 'It's not difficult to do, and generally, 'it's a few clicks to sign up for the updates, but it needs a little effort and discipline. Someone in the company needs to take responsibility for monitoring the updates, attending events and making sure information is shared. 'It's the first step to managing everyday tax risk.  

With the best will in the world, all businesses make mistakes. Sometimes 'it's a simple error, sometimes 'it's because something has changed that the business missed. As mentioned above, tax in the UAE keeps on changing and there are always new laws and clarifications to study and apply.

So if we accept that mistakes are a risk, what can be done to mitigate the risk? The answer lies in a regular review process that aims to identify the errors before the FTA carries out an audit. If that is done, the business will have an opportunity to make the necessary voluntary disclosures and keep any penalty down to the minimum. 'That's important because if the FTA finds the error during an audit, or after 'it's told you an audit is planned, the penalties are potentially much higher.

Some sort of review should be carried out at least once a year, and if the business has never reviewed 'it's VAT or excise declarations/returns since the taxes were introduced, it would be prudent to do it as soon as possible. Errors were very common during the early days of VAT, and we have seen many businesses exposed to big penalties when the FTA audits their early tax periods.

The review itself does not have to be time-consuming as long as it focuses on the basic principles and on the likely risk areas for the business concerned. For example, reviewing a reasonable sample of purchases will confirm whether proper tax invoices are always obtained and retained to support input tax deduction. A targeted sample of purchases will also show whether any non-deductibles, such as personal expenses, are finding their way into the input tax claim. Equally, reviewing a sample of sales will reveal whether VAT is being applied correctly and consistently, whether the date of supply is correct and whether the invoice meets the required standard. These are just examples, and simple review tests can be designed to check the important areas for the business concerned – whether it is imports, exports, partial exemption or anything else.    

Reviews can be built into everyday business practices and do not always have to be a major undertaking. An in-house program of checking discrete areas over a period of time can be a good way of keeping on top of issues before they develop into a major problems. However, sometimes a full and deep review is required, and here, professional advice can be helpful as the advisor will be able to identify the key risk areas to focus on and will bring valuable experience to the exercise.

One of the most important aspects of managing changes in tax law and practice is giving the business time to adapt to the challenges that lie ahead. At the moment, of course, the big change is corporate tax, and the challenges that CT will bring serves as an example of how important forward planning can be.

CT will apply for all financial periods starting on or after 1 June 2023, and the first tax returns will be due 9 months after the year-end. So the deadline for the first returns will be in early 2025.That seems a long way off but 'it's not quite that straightforward – in order to make the return process as efficient as possible, you need to be sure that the accounting system can provide all the data you will need. So, for example, can it provide the analysis of expenses that will be required to maximise deductions or give the breakdown of income that might be needed for some businesses?

And have you identified which transactions might be subject to scrutiny under the transfer pricing rules? Are there accounting policies that need to be reviewed with CT on the horizon? Are there balance sheet items that need to be considered? These are just a few of the issues to be addressed, and there are many more. But most importantly, these are things that need to be addressed before the financial year begins, not during or after, or just before the tax return is due to be filed.

So it might look like nothing happens until early 2025 if your financial year starts on 1 June, but in reality everything needs to be underway much sooner. 'It's an example of how planning ahead is essential in managing tax and how leaving things to the last moment will make things immeasurably harder.

This best practice rule for tax can be summarised very simply: start early.