The cost of failure to implement VAT in Saudi is higher than we think. A 100% failsafe system is needed for economic transactions.

Three challenges stand out, according to David Stevens, GCC VAT Implementation Partner, EY

Sun 10 Feb 2019. Arabian Business.

The arrival of VAT in January last year, marked such a shift in the business environment that, right up to the day of the launch, some were sceptical it would even happen. Many underestimated how much it would affect their operations, and how easily they could fall short of compliance. Leaving themselves too little time, they have since relied on ad hoc, piecemeal approaches leaving them exposed to fines and penalties.

Three challenges stand out. First is pricing itself. The law is clear: all VAT-eligible goods and services must be priced inclusive of VAT. Yet when you walk around many shops, retailers and traders, you will often find one price, and the VAT added at payment. Sellers must price inclusive of VAT – and can be fined large sums for failing to.

Second is tax invoicing. A valid tax invoice is a legal requirement and not an option, yet too many businesses have failed to set up systems to manage tax invoices. This in turn prevents businesses who want to recover their VAT later on from doing so.

Tax invoices are critical to a well-functioning VAT system – and they are the seller’s responsibility.

Third is the lack of automation for compliance obligations – in other words, too few companies use automated systems for completing their monthly or quarterly VAT returns. Instead, they just go back and look at their sales or purchase records and manually pull the information together – an error-prone process leaving a poor audit trail. As regulators’ audit activity and capacity ramps up, businesses without automation will be exposed because a staggering number of errors emerge from manual approaches.

It’s been fine so far

It’s natural to assume that, if you have not suffered a penalty or fine so far, you are safe with your current system – however makeshift. Nothing could be further from the truth. First, there are big reputational risks to mispricing your customers. As knowledge of the VAT law widens, you risk alienating them once they realise you are not playing by the rules.

Second, and more immediate to the business, are the fines. These are not trivial. At best, a business that identifies their own mistake and submits a voluntary disclosure will face a fixed fee of between AED3,000 and AED5,000, a penalty amounting to 5 percent of the tax owed, the tax itself, and an interest penalty, which accumulates over time – and can reach as high as 300 percent.

The interest costs, on an accumulating basis, means even a small error can, over enough time, amount to huge sums.  The next best outcome is if the business finds errors after having received a formal notification of a visit from the auditor, the 5 percent penalty then rises to 30 percent. The most serious outcome is if the authorities find the discrepancy, at which point the penalty rises to 50 percent.

Front up – and fix the leaks

Businesses that do not have their house in order need to consider short and long-term remedies. In the short term, they should do a thorough review of how VAT implementation has gone so far. Even a company that invested time and effort to be VAT-ready and compliant could be guilty of mistakes or problems. Do a health-check and examine your audit over the year so far. Look at your history and identify exposures. Now is the time to front up – not when auditors come knocking. Aside from the increased penalty, if discrepancies are found in a regulator probe, this could lead to a wider investigation into the business, which can be stressful and distracting.

Then comes the long term: only an automated VAT system will be viable and failsafe. As the other GCC states move towards VAT in their own jurisdictions, all businesses will need proper systems, processes, people and functions to automate as much as possible, and remove human error. Then you can get back to what matters: building your business.