Is VAT compliance costly?

Is VAT compliance costly?

Is VAT compliance very costly? Often than not, people talk about the cost involved in being VAT compliant, however, the cost of non-compliance goes un-noticed.

Of course, no one can agree more, that compliance means more work, more vigilance hence require more resources. However have you ever considered looking at the flip side? the consequences of being Non-Compliant?

VAT, obviously being indirect tax, does not directly impact businesses, however, it carries the cost of compliance, but at the same time, is it not true that, while becoming the tax compliant, the improvisation of system & addition of resources has brought value to the business? It has, in my experience, here are some key take ways:

  • Timely invoicing – More resources and better system in place, hence timely invoicing.
  • Reduction in receivables days – timely invoicing and then obligation to pay VAT helps to get paid faster.
  • Internal control efficiency. VAT Audit report with an enhanced accounting system gives more control over operations.

Now let us look at the other side of the coin, what happens if a business is non- compliant or takes it lightly to adhere to tax regulations and laws.

For instance, in my recent experience with a business, the owner under, do it yourself approach while submitting the tax return forgot to account for the imports, and submitted the tax return without using the reverse charge mechanism simply because she was not aware of reverse charge mechanism ended up;

  1. Increasing her tax bill by almost 20K on top of that
  2. She had no clue how to rectify that, now imagine;
    1. The stress it had caused,
    2. Opportunity cost – the time she had to spend in communicating with the tax authority to get it fixed, and eventually
    3. The cost she ended up paying in penalty.

Her words, she would not do it again at any cost, sums up the situation.

Another similar example of non-compliance includes, not accounting for all the VAT paid, Business was missing to claim the huge sum of VAT, which it was paying on POS Bank charges to the bank, despite bank was sending tax invoices, they only noticed after a year after they upgraded their finance team.

Losing bills is the most common example of non-compliance, and getting refund claims rejected simply because the claim could not be backed up by proper information and documents due to immature or outdated systems and lack of resources.

These examples show how non-compliance easily offsets if not outweighs the cost of compliance.

It is never too late, seek professional advice and upgrade system and resources, to give a good start to 2020.

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