The Tribune

In the third of a six-part series,

Res Socius’s Simon Cooper looks at

the tax’s impact on refunds, discounts and overall business cash flow

It seems likely that the Government will go ahead with Value-Added Tax (VAT), although just when remains a matter of speculation. In the interim, good preparation is vital. The key to successful implementation is planning, as it generally is in business.

In theory, the process is simple. The registered vendor collects the VAT, pays most of it over to the supplier, and the balance to the Treasury. When things work out this way, collecting income for the Government is painless. The difficulty comes when the tax points do not coincide. A large stock purchase can take months to convert to sales, long after the date on the supplier invoice.

In the UK, the government allows firms with turnovers of under £1.35 million to log their VAT according to when they are actually paid, although it is yet to be seen if the Bahamian government will implement a similar system here. A parallel scheme allows VAT to average out throughout the year. Modern accounting systems simplify these mattersm, but a businessperson without a method to control these cash flows may end up on a rollercoaster.

The Government has already indicated that VAT-registered businesses will be required to display their VAT registration certificate. Business stationery may also need updating to reflect the VAT number. This may become a legal requirement, since it generates an auditable trail. If so, it may not be prudent to delay the print run until the last minute.

Refunds need careful handling. The fact you have paid the VAT across does not mean the customer is not entitled to a full refund, including their VAT. Things can become even more complicated in the case of a discount agreed to after the event, and in a different VAT period, perhaps. These things need recording carefully to avoid surprises.

There is also a limit on travelling expenses. Individuals acting in a private capacity must pay VAT. While a company may claim VAT back for director and partner subsistence costs, this does apply to their travelling expenses. If a business trip coincides with a large stock purchase, this can skew income for that period. Once again, smart VAT is a matter of attending to timing within the rules. This principle that VAT is not redeemable on purchases for private use extends to staff purchases, too. The sale of assets also incurs VAT. This becomes easier to understand within the concept of turnover tax. With the help of a computerised bookkeeping system and input from an accountant, these things are manageable. Without them, a visit from a VAT inspector is always possible.

Getting the timing right is essential to avoid VAT-related cash flow concerns. Ignorance is no excuse and the penalties can be harsh. Avoiding these hazards involves careful planning, an efficient accounting system and sticking to the rules. Next week, we discuss the thorny question of whether VAT is good or bad for business.

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. He is an agent for the cloud-based XERO Accounting System that is fully VAT compatible. Contact 376-1256 or visit www.ressocius.com.