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VAT: Tax Invoicing & Revenue Accounting Challenges – Part 2

By Babatunde Fowler
14 July 2016   |   4:09 am
Where this split is not properly reflected on the invoice, it will be difficult to differentiate the interest portion of the consideration to which VAT will not be applicable.
Babatunde Fowler, FIRS Boss

Babatunde Fowler, FIRS Boss

Deferred Consideration (continued)

Such arrangement is also similar to a finance lease arrangement where both the capital element and the interest element are inherent. Usually, such sales are covered by written agreements which stipulate the business terms and how the periodic payments are to be made. Tax invoices are issued as each payment falls due. VAT element is required to be inputted to such invoices, but only to the portion of the consideration which relates to the actual selling price of such goods or services supplied. The interest element should be clearly separated on the invoice as VAT is not applicable on it. This is similar to a finance lease arrangement where the interest portion is a return on investment and is not liable to VAT.

This treatment is buttressed by section 5 (2) of VATA which provides that where the supply of taxable goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be such part of the consideration as is properly attributed to it.

Where this split is not properly reflected on the invoice, it will be difficult to differentiate the interest portion of the consideration to which VAT will not be applicable. Clear disclosure is therefore very important.

Bad Debts

Bad debts proven to be uncollectable and on which VAT had been paid in earlier periods can be allowed as offset from VAT payable in future periods.

Returns/Refunds

Sometimes companies have a refund policy for goods sold but returned by the customer for whatever reason that is agreeable to both parties. Amounts refunded would be deducted from revenue originally recognised. VAT is to be calculated based on the subsisting revenue at the end of the monthly reporting period. Since VAT returns are to be made 21 days following the month of transaction, and the window for returns is usually very short in practice, it is expected that any refunds that may impact revenue for any particular tax period would have been reflected in revenue/turnover before the associated VAT returns are filed in the month.

However, where the returns and refunds are made after the VAT attributable to the sale has been remitted, amounts verifiable as refunds would be accorded the same treatment as bad debts and allowed as offset from VAT payable in future periods.

Goods on Test Usage

For goods given out on test usage, revenue for both accounting and VAT purposes is recognised when the test period is over and the test-user opts to buy the product. At this point, the owner raises invoice for the sale of the product. Thus, VAT is applicable once there is sale.

Upfront Fees

Where fees for services rendered are payable upfront, e.g. mobilisation fee (under a construction contract or deposit for supply of goods or services), and there is neither exchange of goods or services nor transfer of risks and rewards of ownership to the buyer, such payment may not be recognised as revenue but deferred as unearned revenue. Payments are only recognised as revenue only to the extent that goods or services have been provided and by reference to the stage of completion of the transaction.

Invoices may not be issued but receipts may be issued to acknowledge payment received. VAT may not be due on such payment unless the advance payment is invoice based. If VAT is paid in line with the revenue recognition method, the onus is on the taxpayer to keep record of the basis for the difference between the sales invoice amount and the accounting revenue recognised in the affected periods.

Customer Loyalty Programs

Some entities make use of customer loyalty programmes to incentivise customers to buy their goods or services. Customers buying goods and services are granted customer award credits (often described as ‘points’) by the entity, which can be redeemed for awards such as free or discounted goods or services.

The accounting standards require the consideration received or receivable on such sale to be allocated between the award credit and the main component(s) of the sale. The award credit portion is deferred and not recognised as revenue until the seller has fulfilled its obligations in respect of the award credits i.e. when the free or discounted goods have been redeemed by awardees.

Under the customer loyalty program, the accounting turnover for the periods involved would most likely differ from the invoice turnover. This is because the tax invoice is usually issued on the actual offer price of the main good or service which fetches the future awards/discounts, while the accounting revenue for this good or service would be lower at the initial periods, since the revenue recognised would be split between the main good or service which is sold and the award (which is recognised only at later periods when the awardees claim them).

Only the actual selling price (under normal circumstances) of all the goods or services involved – both the main goods or services sold and the award credit (either as free or discounted products) would be considered for VAT purposes. As explained earlier under ‘cash discount arrangements’, the invoice should reflect the actual selling price of the goods/services and the 5% VAT payable on it prior to recognising any award components ‘below the line’. This is because customer loyalty programs are also not the making of the tax laws/authorities. They are pure business decisions taken at the discretion of the business owners and therefore should not affect the VAT payable on the actual prices of the goods and services. It should also be noted that VAT is paid by the consumer and not the person that is implementing the loyalty programme.

There are several sales strategies employed by companies, depending on the managements’ focus and sometimes industry practice. The general interpretations of the provisions of the VAT Act should always guide the determination of VAT liability on such transactions.

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

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