If I had a Jaffa Cake for every time someone tried to convince me that value added tax (VAT) was not going to be introduced on January 1, 2018, I could seriously fatten the circle of accountants from which these articles arise.
Launching VAT requires the Government to complete two, very achievable, deliverables.
Firstly, a business applying with a valid trade licence gets issued a unique VAT number.
Lastly, a platform that captures the information provided in periodic VAT submissions. This one page form is likely to contain about a dozen fields.
These would include: your VAT number (1), reporting period (2), revenue by emirate (9), total purchases (10), total output VAT (11), total input VAT (12) and the amount owed or being reclaimed (13). That is it.
Your IT function could develop this form and a database to save it to.
But wait, the unbelievers cry – there will be so much data they won’t be able to utilise it. Not so.
When trade licences are applied for, a choice is made as to what business category it trades within. It is in this ability to logically sort firms that decisions on VAT audit focusing will find their origin.
There are four reasons why you can get audited, the last is where this information comes into its own.
When a submission for reclaiming VAT is made, this typically triggers an automatic inspection. There are situations where this may always be the case; say a hospital, which will be zero rated. Costs to the hospital will be reclaimed, but no VAT is charged to customers. These automatic visits will subside once confidence that nothing is awry is confirmed.
Next, all registered businesses should expect a cycle visit once every five years. Where you fall into this is random.
As a one-off, it is likely that there will be a broad series of general compliance audits conducted in the early years after launch, again although targeted, there is unlikely to be an overt focus to that list.
Finally, we come to forensic identification of areas that it is felt need monitoring or deep investigation. These fall into two categories.
Global experience teaches us that certain sectors are susceptible to errors and transgressions.
Earlier I mentioned that the Federal Tax Authority (FTA) can split submissions by sector, further analysing them utilising standardised ratios, eg, the net of revenue and purchases as a percentage of revenue.
For any given industry there will be an average. Beyond a tolerance level, those businesses that fall outside this are automatically suspect. Having decided on how many are to be audited, that tolerance level is expanded or collapsed to capture that number.
Producing metrics to support investigations is not necessarily the FTA’s first port of call. Commencing targeted investigations upstream in supply chains is not primarily used for the purpose of validating the business being audited, but instead to get a holistic view of their customers downstream.
A list of all their customers, ordered by the value of sales, gives an indication as to whether they should be VAT registered or not. That list can be quickly validated to ensure that they are, immediately identifying entities that are acting illegally.
Additional analysis might suggest that some of those registered customers are under reporting VAT.
These entities will be unaware that they are even being investigated. Indeed the entity that is being audited won’t either, as they will be distracted in ensuring that their own audit goes smoothly.
Where selective targeting fails to identify non-compliance, what follows nearly always does.
A key source that triggers a VAT investigation is specific information that there are issues within a business, be it compliance or fraudulent.
Peter Whatley, the chief executive of Argent Gulf Consulting said, “When I was a VAT inspector in South Africa, our single biggest reason to initiate an investigation was a tip-off that something was amiss. This would typically come from a disgruntled employee.
“This alarm-raising system could be used anonymously. The Government, at the time, felt that given the potential criminal nature of the offence, a reward should and was offered to those prepared to be identified. This was paid on successful prosecution (where applicable) and collection.
“This payment could be up to ten per cent of the monies recouped, primarily being paid out of the guilty party’s fine. In 2012 in the US, the IRS [Internal Revenue Service] announced that it was paying a whistleblower US$104 million as a reward for his contribution towards an investigation into the banking industry.
“There was a potential for nuisance calls, from a competitor, employee or ex-employee with a grudge, so no action would be taken without weighing the likelihood of the individual’s claims.
“For example, in the UAE, the FTA might review the quantity and nature of Labour Court cases lodged against a business when deciding whether accusations have merit.”
In these situations, the true powers of the FTA are revealed. Naturally no notification will be given, they are likely to turn up not only at the offending party’s offices and depots, but at their customers and even private residences.
This might not even be the ultimate recourse. Very often VAT fraud begins with a cash crunch within a business; deliberate non-declaration of revenues used as a method of recovering from cash flow issues. Investigations can often tip these distressed businesses into insolvency as management are distracted from their roles.
An entity that collapses in this situation might not be able to settle its VAT liability.
David Daly is a chartered accountant (Cima) typically serving in chief financial officer or finance director roles.
business@thenational.ae
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