Importance of Supplier Due Diligence in VAT Refunds

When a business applies for a VAT refund, most of the focus is usually placed on internal compliance and documentation. However, one critical aspect that is often overlooked is the compliance status of suppliers. Under UAE VAT procedures, the Federal Tax Authority conducts detailed desktop audits whenever a refund claim is submitted. As part of this review, the authority may also examine whether your suppliers have correctly reported and paid VAT on the supplies made to you.

If a supplier has failed to remit VAT, has inconsistencies in reporting, or is no longer operational, the authority may raise queries or withhold the refund until the issue is clarified. This can cause significant delays even when the business itself is fully compliant. Such delays directly affect cash flow and may place financial strain on operations, especially for companies that deal with high input costs or operate on thin margins.

To reduce these risks, it is essential for businesses to carry out proper due diligence during supplier onboarding and throughout the business relationship. This includes checking the validity of the supplier’s tax registration, reviewing VAT returns when permissible, ensuring that tax invoices are issued correctly, and monitoring any early signs of non compliance. A structured supplier review mechanism not only strengthens internal controls but also provides a higher level of assurance during refund audits.

Maintaining strong tax discipline in supplier management supports smooth processing of VAT refund claims and minimizes exposure to disputes or queries from the authority. By taking a proactive approach to supplier compliance, businesses can protect their cash flow, improve their audit readiness, and enhance overall VAT governance in the long term.