“A fine is a tax for doing wrong. A tax is a fine for doing well.”
VAT can be complicated, especially if you have never encountered it before.
Is VAT freaking you out, causing loss of sleep and stress? Well, you’re not alone. Many people are struggling with it. We talked to several accountants to find out what their clients reported as the main problems. Here’s their list.
1 Poor record keeping
The main problem appears to be a combination of process and habit. Most small businesses’ VAT return problems stem from one major error – poor record keeping.
Fixing this is probably the single most important thing SMEs can do to make life easier for themselves (and their accountants) when it comes to filing. Some common issues are:
- Make sure details are correct on both sales invoices and the supplier invoices you are claiming the VAT back on.
- If you don’t have a VAT receipt, you don’t have a claim. Keep all receipts, and check those receipts are actually claimable.
- Keep records of all sales. And ensure you know the VAT TRN of customers if they are registered.
2 Lack of regular reconciliation
Why is this important? Many small businesses don’t account properly for the VAT they have collected, treating it as THEIR money. It’s not. It’s the Government’s money, and you’d be wise to put into a separate account that you cannot “open by accident”. This will stop you having to borrow from your relatives when your VAT return is due because you’ve spent the money. Once you are certain your record-keeping is accurate, make sure you regularly reconcile your books so that you have a running total of your VAT situation.
3 Ignorance about how VAT is calculated.
Many business owners still have no clue how VAT is calculated, much less filed. Just look at the number of VAT seminars all the accounting firms are running!
In the UAE and Saudi Arabia, you pay VAT on your sales whether or not your customers have paid. You then reclaim VAT from your suppliers’ invoices, whether or not you have paid the bill. It’s that simple. But many people think they don’t have to pay VAT until THEY have been paid. FAKE NEWS!! Therefore, you must have a really good system for getting payments in on time.
4 Your VAT admin person is ignorant (about how it all works).
Even if you know heaps about VAT, your admin assistant/office manager/person in charge of accounting probably doesn’t have a clue. So, you need to ensure they have the knowledge and expertise required to ensure your business is VAT compliant. For instance, you (and they) must be aware when you reach the VAT threshold for registering.
There are severe penalties for not registering at the correct time.
They (or you) will either need bridging software to manage this if you use spreadsheets, or accounting software for electronic end-to-end filing. This cannot be done on scraps of paper.
If you have good bookkeeping software (either on-line or excel) and learn to use it properly you can have confidence in your financial figures. Then you can drive the business forward with the correct information.
5 Entering the wrong figures in the tax return.
“I’m sorry” doesn’t work here. You’ll be fined. The immediate assumption by the government is that you are trying to evade tax. You need to remember that in the GCC, VAT is one of the most important parts of each government’s revenue raising.
For most small businesses, if your VAT liabilities are relatively straightforward, it is possible to file your own returns. But getting it right is vital.
If you are unsure or have complex liabilities, or simply don’t have the time and inclination to plow through your VAT returns, you should do one of two things:
A) invest in a software package that makes filing really simple, and helps you stay on top of your bookkeeping
B) to hand the work over to an accountant.
The downside of this option is that you won’t have the same feel for the numbers in your business as you would if you choose option A.
The penalties for VAT mistakes are severe and the reputational damage to your business is not worth the risk. So don’t delay, choose today!