The Tribune

Politicians love the cumbersome system we call Value-Added Tax (VAT) as much as businesspeople resent it. Governments prefer it to direct taxation because they hope voters will believe the tax rate is lower than it really is. Those in commerce regard it as another example of labor-draining government bureaucracy.

After the French invented the idea in the 1950s, other European countries followed, with Britain finally joining in as a condition of entering the European Union (EU). Just about every major country has adopted VAT since then, with only the Americans still arguing that the idea does not sit well with their world view.

Most countries start their VAT rate relatively low, arguably as a sop to the noisy few who object loudly to any form of stealth tax. For example, the UK has doubled the original rate of 10 per cent since introducing it in 1973. Other countries with high headline rates include Hungary (27 per cent), Sweden (25 per cent), and Spain, Belgium and Argentina at 21 per cent.

VAT is usually gentler with essential goods and services, although definitions of these and discounts given vary tremendously. The UK zero rates “life necessities”, including groceries, water, prescription medications, medical equipment and supplies, public transport, children’s’ clothing, books and periodicals. Belgium just reduces VAT on “essential and selected goods” to 6 per cent.

It is virtually impossible to compare net VAT rates between countries without detailed knowledge of the economies and complex algorithms. This helps politicians tap-dance around cross-country comparisons of their favourite tax, while they manipulate the “opted outs” around election time.

The Bahamas government has been mulling over VAT for some time now. The main driver is the need to reduce import duties to World Trade Organsation (WTO) levels, while maintaining current income and revenue levels. The Tribune puts the number of businesses affected at 3,800.

Whether or not the Bahamas government will hit its targets accurately is a matter of speculation. This includes whether our fiscal deficit will be eliminated by 2016. We are entering relatively unchartered waters and will have to wait and see.

Business is understandably wary of what is coming its way in July 2014. Concerns include rising prices to compensate for VAT, and the perceived financial burden of administration. The complicated formulae some consultants have put out in an attempt to explain the process, have not helped either.

Luckily for business, modern accounting systems have VAT modules that require little more than VAT rates per stock code to automate VAT returns. The Xero accounting system I market through my business, Res Socius, provides an affordable solution to small business owners, who appreciate the support and secure cloud storage Xero offers.

Next week we will discuss how VAT is handled at the business level, and what owners of registered businesses can do to make the transition effortless.

• NB: Simon Cooper is a founding partner of Res Socius, a firm authorised by the Bahamas Investment Authority to facilitate the sale and purchase of businesses and provide management consultancy services. Contact him at 376-1256 or visit www.ressocius.com.