All About VAT Reconciliation in Saudi Arabia

Value Added Tax (VAT) is an indirect tax levied on selling goods and services in Saudi Arabia. Businesses registered under VAT must collect and remit VAT to the tax authorities. In this process, businesses must report accurate sales and purchases; to do so, they must do the VAT reconciliation.

VAT reconciliation helps you avoid higher VAT payments (a loss to the business) and ZATCA notices for short VAT payments. Hence, it is necessary to reconcile sales and purchase data to file VAT returns and make correct VAT payments accurately. 

This article explains all about VAT reconciliation, including what it is, the impact of e-invoicing, how to do it, and its benefits.

What is VAT reconciliation?

Reconciliation means comparing two data sets for accuracy. In the Saudi VAT context, reconciliation means reconciling the sales with e-invoice data before reporting to the Zakat, Tax, and Customs Authority (ZATCA). Businesses must do the reconciliation before filing VAT returns for accurate reporting.

Further, the introduction of e-invoicing mandated businesses report the sales transactions to the ZATCA. With all the transaction-level data available with ZATCA, reconciliation becomes more crucial as ZATCA audits the e-invoice data and compares it against the VAT amount filed.

How does e-invoicing impact VAT reconciliation?

Phase 2 of e-invoicing in Saudi mandated businesses to integrate their ERP/POS/accounting software with ZATCA to report all the sales. Accordingly, ZATCA has a data repository of all businesses and can track each sales transaction submitted to ZATCA.

Hence, businesses should be more careful while filing VAT returns, as ZATCA can easily compare the data reported through e-invoices and VAT returns. Any difference will result in a notice and further fines/penalties.

How to do VAT reconciliation?

Here’s the step-by-step process of VAT reconciliation:

Step 1: Gather all relevant information, such as e-invoices, credit notes, debit notes, etc.

Step 2: Organise and enter the data into a spreadsheet or reconciliation software.

Step 3: Now, compare the sales recorded in the General Ledger (GL)/Sales Register (SR) and those reported through e-invoices.

Step 4: Review the output of the VAT reconciliation statement to ensure all the information is accurate and complete.

Step 5: Identify the differences and categorise them into exact match, partial mismatch, missing in sales data, and missing in e-invoice data.

Step 6: Correct the differences arising from partial mismatches and missing in SR. Further, coordinate with customers to obtain missing or corrected invoices or adjust the VAT return to reflect the correct amount.

Major reasons for VAT reconciliation differences

Below are a few of the major reasons for differences found during VAT reconciliation:

• More sales e-invoices generated in the e-invoicing solutions compared to sales register
• Credit notes issued for the cancellation or sales return but not reported to ZATCA
• Missing invoices in the sales register or e-invoices data
• Failed invoices not corrected and resubmitted to ZATCA
• Month-end sales reported late to ZATCA
• Failure to report some transactions to ZATCA due to connection issues in integration with ZATCA

Benefits of VAT reconciliation

Apart from complying with VAT regulations, VAT reconciliation helps you:

• Identify errors or discrepancies with e-invoice integration and fix them
• Correct all failed e-invoices submitted to ZATCA
• Report accurate data in VAT returns
• Payment of correct VAT due
• Avoid ZATCA notices
• Save from penalties and fines

Further, suppose a business paid more VAT on purchases than it has collected from customers; it may be able to claim a VAT refund from the tax authorities.