VAT: Tax Invoicing and revenue accounting challenges

Filing of Value Added Tax (VAT) returns and payment of tax due is made monthly but not later than the 21st day of the month following the month in which the transaction occurred. It is usually based on the value of the supplies done. There are some issues to note in calculating VAT payable where certain selling arrangements or circumstances are in place. One of the critical issues has been the point at which VAT should be computed under different selling arrangements.

Some of the arrangements include trade/ cash discounts, credit sales, deferred consideration, bad debts, returns/refunds, upfront fees and customer loyalty programmes. In some of these, the tax authority’s treatment may vary from the position of the taxable person. The difference is between the cumulative invoices and turnover disclosed in the audited accounts at the end of the trading period of a company. It is not likely that the invoices’ summary at the end of a trading period would agree with the turnover for the same period due to different provisions of the accounting standards, especially the International Financial Reporting Standard (IFRS).

Notwithstanding any variation in accounting standards, Nigerian Value Added Tax administration is invoiced-based. Consequently, whatever approach is adopted to determine the value of the consideration in accordance with the law, VAT becomes chargeable at the point of raising the invoice. Agitations have been expressed on the reasonableness of paying VAT on amounts that are yet to be collected from customers vis-à-vis the impact on cash flow of the taxpayer. While the fears appear sound and founded, it may be counteracted by the fact that a set-off exists by claim of input tax on credit purchases that have not been paid for by the taxpayer. Also, the choice of business arrangement is that of the business person and not universal; whereas taxation is of universal application.

The Concept of Tax Invoices Versus Accounting Revenue/Turnover It is pertinent to note that since accounting ‘revenue’ or ‘turnover’ is usually a focal point for computation of VAT payable, determining the appropriate VAT treatments of these sale arrangements requires a sound understanding of the prescribed accounting treatments.

The law requires every taxable person who makes a taxable supply to issue a tax invoice showing, among other information, the gross amount of transaction, the rate of tax applied and the tax charged to the purchaser. The law therefore presupposes that the issuance of tax invoices for every taxable supply made, both in goods and services. This implies that the focus of the law is on value of taxable supplies as shown on the invoice rather than as shown in the financial accounting systems. In other words, by law, VAT payable is invoice-based.

In practice therefore, a meeting point must be established between these two focal points (accounting revenue and tax invoices). This is particularly important in dealing with reconciliation of VAT paid against the turnover in the audited accounts. Taxpayers experiencing this situation are advised to keep proper records of tax invoices issued and the cumulative VAT payable/ paid based on such invoices. The unique selling arrangements discussed in this article are good examples of occasions where such discrepancies usually arise.

Trade/Cash Discounts Allowed International Accounting Standard (IAS) 18 provides that the amount of revenue recognised for a transaction is the net of any trade discounts or volume rebates given because these discounts and rebates are not received as consideration by the seller (IAS 18:10).
Under a trade discount arrangement, invoices issued will reflect the amount of agreed consideration between buyer and seller less any trade discount granted. In this wise, the amount chargeable against the customer is the selling price less trade discount. This net value is the base for computing VAT.

The determination of VAT payable in a cash discount arrangement, on the other hand, is made on the basis of ‘above the line’ items on the invoice. i.e. actual selling price before cash discount is deducted. In other words, VAT at 5% is to be applied on the normal selling prices of such goods/services without any consideration for cash discounts allowed. This is because cash discounts are purely discretionary business decisions by business owners for the purposes of encouraging early payment and therefore should not affect the VAT payable to the tax authorities on the normal selling prices of those goods and services. In addition, payment of VAT burden is on the consumer and not the supplier.

Credit Sales
VAT on credit sales is required to be computed on the total supplies. There are controversies around payment of VAT on credit sales but the fact remains that no company’s trade credit policies are set in agreement with the tax authorities, neither are eventual payments by their customers monitored by the tax authorities. Credit sales are purely business decisions by management of business entities and should not affect the VAT payable on any taxable supplies made in the period. As pointed out earlier, partial equilibrium is attained with the allowance of input tax claims on credit purchases.

Deferred Consideration
Most trade receivables are due within a relatively short time frame, such as one month or less. But in special circumstances, the seller may allow the buyer an extended period of time for payment of the consideration, usually spanning months or years. This is all dependent on the nature of goods or service sold or rendered and the sales agreement between the buyer and the seller.

According to IAS 18, the consideration or selling price in such an arrangement consists of two elements- the actual price of the good or service (principal element) and the interest element arising from the financing plan. As the time value of money in such circumstance would not be the same as in a normal short-period credit sales transaction, an interest element is imputed into the price of the goods/services supplied to make up for the length of time it takes the buyer to pay up. In other words, this is treated partly as a financing arrangement.

Babatunde Fowler is the Executive Chairman of the Federal Inland Revenue Service (FIRS) and this article is part of FIRS’ Tax Discourse series, initiated to enlighten and educate taxpayers on important tax technical topics. It is designed to be an interactive platform where readers are encouraged to send in their comments/enquiries to wahab.gbadamosi@firs.gov.ng. Vi-M Professional Solutions is the official partner to FIRS on the Tax Discourse series and enquiries can also be sent to clients@vi-m.com. Archives of publications are available on www.firs.gov.ng or on www.taxdiscourse.vi-m.com/FIRS