The Increase in the VAT Rate - Are you ready?
05 March 2018
By Seelan Muthayan
The 2018 budget speech heralded an increase in the VAT rate to 15%. This is the first increase in 25 years. In the last 25 years, businesses have become more and more reliant on ERP and accounting systems. Companies now have less than a month in which to update their systems and documentation, and upskill their staff on what needs to happen as a result of the VAT increase. Failure to change systems to cater for day-to-day transactions could impact cash flows, and also result in penalties and interest.
Are you ready to implement the VAT increase? In the coming weeks BDO will provide you with additional information you should consider when updating your systems and processes.
So what should you be aware of?
TRANSACTION DATE – “TIME OF SUPPLY RULES”
The VAT rate that should be used will be determined by the time of supply rules (i.e. when is the transaction deemed to take place). The general time of supply rule which would apply to most transactions provides that the time of supply is the earlier of the issuing of an invoice or when payment is received. Therefore, most transactions which occur on or after 1 April 2018 will be subject to VAT at the new rate of 15%. Some important issues which business should consider are the following:
- VAT on Importation of Goods
The VAT rate applicable to the importation of goods will be the VAT rate when the goods are cleared for home consumption for customs purposes. If the goods are cleared on or after 1 April 2018 the new rate will apply. This will be the case even though the goods may have arrived in the country prior to 1 April 2018.
- VAT on Imported Services
The VAT rate applicable to imported services will be the VAT rate applicable at the earlier of the date an invoice is issued by the supplier or the recipient in respect of the supply or the date any payment is made by the recipient in respect of the supply.
- Debts Written Off or Recovered
If a vendor writes off a bad debt it is entitled to claim an input tax deduction. If the underlying supply was made prior to 1 April 2018 and the debt is written off after 1 April 2018 the question arises as to what VAT rate should be applied. The VAT Act provides that the rate applicable to the underlying supply will apply to any amount written off. To the extent that a debt is subsequently recovered the VAT Act deems a supply to be made in the tax period when the debt is recovered. This would mean that amounts recovered post 1 April 2018 would be subject to VAT at 15% despite the fact that the underlying supply was subject to VAT at 14%.
- Credit and Debit Notes
If credit and debit notes are issued after 1 April 2018 the general rule will be that the old VAT rate must be applied if it relates to the supply of goods or service made prior to 1 April 2018. Accordingly, the new VAT rate will apply where debit or credit notes are issued in respect supplies made on after 1 April 2018.
- Existing Agreements
Vendors should review existing agreements to ensure that they are entitled to recover the increase in the price from their clients. Generally, vendors will be entitled to recover the increase unless the parties have specifically agreed to in writing that the price cannot be increased as a result of an increase in the VAT rate.
The transitional rules in the VAT Act provide guidance in respect the VAT treatment of specific transactions which include the following:
- Lay-bye agreements
- The supply of fixed property
- Instances where goods are delivered or services are rendered before 1 April 2018
- Supplies commencing before and ending on or after 1 April 2018
- Agreement concluded between 21 February 2018 and 31 March 2018
- Goods delivered and/or services only rendered on or after 1 April 2018
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