What you need to know:
Audits are retrospective and can go as far back as five years or more depending on your circumstances. Before the start of an audit, you will receive a formal notification from the Uganda Revenue Authority, Crystal Kabajwara writes.
In my previous article, I explained the different kinds of audits and investigations that are typically carried out by the revenue authority.
Today, we will focus on the preparation for and management of tax audits.
A tax audit is not a planned event like a wedding or anniversary celebration. I would liken it to death – nobody knows their day or the hour, except that it will come.
Therefore, like death, the best time to prepare for an audit is now and not tomorrow. This means that all relevant financial records that affect or explain your tax position such as audited financial statements, supplier agreements, sales invoices and payment receipts must be prepared and kept daily. This is the first step in tax audit preparation.
Audits are retrospective and can go as far back as five years or more depending on your circumstances. Before the start of an audit, you will receive a formal notification from the Uganda Revenue Authority (URA).
When the URA requests information, they expect you to provide it immediately regardless of the passage of time. I’ve seen taxpayers spend sleepless nights over a payment dating back five years whose documentation they couldn’t trace. The amounts involved were significant and it ended in tears.
When you receive a URA audit letter, you must read the letter carefully to understand the scope of the audit in terms of tax heads to be covered and the period under audit.
The period is particularly important as the tax law contains statutory limits for record-keeping. Taxpayers are generally required to keep records for five to six years for VAT from the end of the period to which the record relates.
Therefore, if the audit period exceeds the statutory limit, you are within your rights to request an explanation.
It is important from the start to designate a contact person who will liaise with the URA audit team.
The person’s role is to ensure that information is provided to the auditors promptly, clarification is provided, queries are handled expeditiously, and potential areas of disagreement are quickly escalated via the appropriate channels.
During the audit, you will be asked questions or to provide specific information. Only provide the documents needed to support the issue under discussion and do not give more than what is requested.
When questions are asked, be honest and brief; when in doubt, request for time to consult and get back with accurate answers. Never feel pressured to provide answers on the spot as the consequences of providing inaccurate or misleading information can be dire.
It is common for the auditors to spend days or even weeks at your business premises. Be a good host and remain courteous (it is okay to provide refreshments) however, ensure that your staff are aware of the auditors’ presence and limit unnecessary interaction with unauthorised staff.
Audits can take a while and the timing is often inconvenient. The duration of the audit will depend on several factors such as the type of the audit, the complexity of the issues and the availability of the information. It is okay to request for more time to respond to information requests or to reschedule any meetings and I’ve found the URA to be quite flexible when genuine commercial reasons are given for delays.
At the end of the audit, you will be presented with audit findings that will be discussed with you in a meeting and this will be followed with a management letter. In the meeting, it is important to highlight any findings that you disagree with.
Once the audit team leaves your premises, getting closure on contentious issues becomes difficult. Therefore, maximise the time when the team is on ground.
In discussions with the audit team, separate technical issues of the tax law that require interpretation from factual issues that are a reconciliation issue.
This helps narrow down areas of disagreement for escalation through the objections and appeals process, which we shall discuss in the next article.
TAX AUDIT TRIGGERS
One of the triggers of a tax audit is a business that is in a consistent loss making position. If a business has been operating for more than three years and has never reported an accounting profit or has tax losses, this tends to raise a flag.
The tax authority will seek to establish whether there are genuine commercial reasons for the losses or not. Maintaining proper records that show the performance of the business is critical for the management of this risk.
Another trigger is a decline in tax payments over a period of time. A business that has been a top taxpayer whose tax payments suddenly decline, may be a cause for alarm.
The author is Associate Director with PwC Uganda’s tax practice