As indicated in one of our previous articles, a decrease or increase in VAT rate triggers a variation in the time of supply rules in order to accommodate pipeline transactions.
Such rules supersede the normal time of supply rules. Goods will be deemed supplied (provided) when they are delivered, in the case of services when they are rendered and for supplies such as rental agreements (operating lease) etc supply takes place when the recipient takes possession/ occupation thereof.
Therefore, if delivery of goods or possession/ occupation of property took place before the date of change in tax rate, the supply will be levied to tax based on the rate before change (old VAT rate).
Where this has occurred after the rate change, the new rate applies, unless the payment or invoice has already been issued against the supply.
We further indicated that for some transactions both rates would be applied and that even after January 1, 2020, registered operators will have to keep both rates in their system to deal with some reversing transactions.
Examples of transactions where both rates would be applied are services, rental, construction etc contracts whose performance began before the rate change and ends after the rate change. The supply will be apportioned according to the time of performance with part of the supply subject to the old rate and the other part based on the new rate.
Cognisant to the administrative difficulties emanating from the variation in the rate, the Zimbabwe Revenue Authority issued Public Notice No 9 of 2020 to provide guidance for the filing of returns by operators in Category A.
The public notice has directed them to file two returns manually to avoid mixing the tax rates.
However nothing has been stated of errors in application of wrong rates. We guess there was no need because taxpayers are expected to be vigilant and secondly there are rules within the VAT Act to handle variation in the value of supply. This is the subject of this article as fully explained below:
Despite the announcement by the Finance minister of the rate change as early as the second week of November 2019, some suppliers may find themselves caught up in the mix and may apply the old rate on transactions on which the 14,5 percent rate should be applied or may fail to apply the transitional rules correctly. The question that stands to be addressed is, what happens when a supplier is caught up in the dilemma of mixing VAT rates?
The integrity of the VAT system is based on documentation of which the primary document is the tax invoice. This is the document that originates transactions. The secondary documents are the credit and debit notes and their purpose mainly is to vary transactions made through the tax invoice. Journals have no place in the VAT system.
Therefore, where the tax charged on the tax invoice is different from the actual tax chargeable, an adjustment by way of a debit or credit note is required without having to cancel the original tax invoice. These documents are meant to alter the original consideration agreed upon for a past taxable supply, after the tax invoice has already been issued.
They are used when a supply is cancelled, the nature of that supply has been fundamentally varied or altered; the previously agreed consideration for that supply has been altered by agreement with the recipient, the goods or services or part of the goods or services supplied have been returned to the supplier etc.
Therefore, to deal with incorrect application of the VAT rates, registered operators should make use of credit and debit notes which are basically mechanisms for dealing with errors on original invoices.
The registered operator should issue a credit note to the buyer where it incorrectly charged 15 percent instead of 14,5 percent. This has the effect of reducing the supplier’s output tax and increase the buyer’s input tax.
Where the reverse occurs, the seller should issue to the buyer a debit note in order to charge extra VAT required. A debit note to reduce the value of the supply can also be issued from the buyer’s end. These documents should be tax compliant.
Features of compliant credit or debit note includes the name, address and registration number of the registered operator and that of the recipient, the date on which the credit/debit note was issued; either the amount by which the value of the said supply shown on the tax invoice has been reduced or increased and the amount of the excess tax; or either the amount of the excess tax or a statement that the reduction includes an amount of tax and the rate of the tax included; a brief explanation of the circumstances giving rise to the issuing of the credit note; information sufficient to identify the transaction to which the credit/debit note refers.
However, it is difficult to apply credit or debit note in the case of closed transactions, i.e. over the counter transactions or where the buyer is not traceable. The complication is that a credit or debit note cannot be issued to a non-existent buyer. One of the key attributes of the VAT system is that it is not meant to create unjust enrichment. By this we mean, a supplier who has collected VAT from customers at higher rate cannot keep it to himself/herself.
He or she should remit the money to the fiscus as it is. Where on the other hand, a registered operator has charged a transaction to tax at a lower rate, this becomes a compliance issue. He must apply the correct rate and remit out of his own pocket the extra VAT required, in which case the operator should issue a debit note.
In a nutshell, some suppliers who are caught in the mix of applying a wrong rate should seek refuge in the tax compliant credit or debit note. Where these cannot be utilised they have to forward the VAT overcharged to the fiscus because the VAT system is not meant to create unjust enrichment and if for some reason VAT was under charged the correct tax must be paid otherwise there will be a compliant gap which may result in penalties and interest.
Meanwhile Matrix Tax School will be hosting a VAT Seminar to discuss these and other practical issues on March 18, 2020.
Tapera is the chief executive of Matrix Tax School. He writes in his personal capacity.