PBC ACCA

UNIT 14

VALUE ADDED TAX

Accounting and Administration of VAT

1. Accrual-Invoice basis
• VAT is accounted for when an invoice is raised or when payment is made
whichever occurs first.

Advantages

Operator can claim input VAT before payment or settlement of the bill
Fewer adjustments are required when reconciling VAT returns against the
income tax return.
VAT is accounted for once despite the invoice being settled in multiple
instalments.

Disadvantages

The operator must pay output VAT before receiving the payment from
customers
A list of debtors and creditors must be retained at the end of the tax period.
Can lead to cash flow problems
2. Cash basis
• VAT is accounted for when payment is made or received for the supply.
• The method is currently available to organisations not for gain, local
authorities and public authorities
• An application must be made to the commissioner to be granted this basis.
• It is suitable for operators offering customers extended periods
• It is an administratively expensive method

Illustration 1

Calculate the VAT payable under the invoice basis and the cash basis for XYZ Ltd, a
registered operator. XYZ made $500 000 sales, $280 000 of which were credit sales. The
purchases figure amounted to $300 000 of which $200 000 were cash purchases.

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Amounts are exclusive of VAT.

Changing the basis

• Where a registered operator moves from basis to the other, VAT adjustments are
required
• The adjustment are required to eliminate double charge or claim that may result
from debtors and creditors.
• Adjustments may result in more payments, or amounts being refunded by the CG.

Time of supply

• Is the tax point for accounting for VAT

• A general rule is that VAT must be accounted for on the earlier of invoice being
issued or payment being received.
• VAT accrues with reference to a specific date
i. Invoice date, or date when the payment is made (the earlier of the two)
ii. Date of delivery if no invoice is issued.
iii. Date of agreement (fixed property) where no transfer or payment has been
made.
iv. When the token is taken or inserted from or into the machine.

Supply to a connected party

• Goods are supplied when they are made available to the customer or
• Services are supplied when they are performed

Illustration 2

NPQ a category A registered operator sold its 60 KVA generator to its subsidiary, ACE
Ltd, on 1 October 2013 for $250 000. ACE collected the generator on 15 October 2013, was
issued with an invoice on 2 December 2013 and paid for the supply in full on 16 December
2013.

Required

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What is the time of supply of the generator for VAT purposes?

Successive supply

• Where a supply requires that payments be made at successive stages, the tax point
shall be the date on which the invoice is issued and payment is received whichever
occurs first.

Rental credit agreement

• The tax point is the date on which payment is due or the date on which the
payment is received whichever occurs first.

Coin operated machines

• For the recipient, time of supply is the time the coin is inserted into the machine
• For the supplier, the time of supply is the time the coins are removed from the
machine.

Construction contracts

• The tax point is the point at which each certification is done.

Illustration 3

RSE Contractors, a registered operator under category C, is building a hotel for a total
contract price of $5 600 000(VAT inclusive). The agreement provides for progress payment
to be made over a period of 12 months. By end of 30April 2014 work certified as complete
was 10% of the contract value. The contractor issued the invoice based on this certification
on 30 April 2014.

Required

What is the tax trigger point in relation to this supply?

Value of supply

• The value of supply is the consideration in the form of money received, excluding
VAT

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 • For barter supplies, the value is the market value of the item received or given
away
• A supply for no consideration such as a donation has no VAT consequences
• For a supply made between connected parties for no consideration or a
consideration which is below the fair market price, the value of supply is
determined is determined as follows:
o If the recipient can claim input tax- the value is the consideration
o If the recipient cannot claim input tax-the value is the open market value

Donations

• VAT input is claimed on a valid tax invoice, without which input tax cannot be
claimed.

Tax Invoice

• Forms the bases of claiming input VAT.

• It is mandatory for registered operators to issue a purchaser with a valid tax
invoice
• Failure to comply attracts a penalty
• A tax invoice must be issued within 30 days of the date of supply
• Only one tax invoice can be issued for each supply

Features of a tax invoice

• The words tax invoice in a prominent place.

• Names and addresses of the supplier
• VAT registration number of the supplier
• Name, address and VAT registration number of the recipient
• Serial number and date of issue
• Description of the goods
• Quantity or volume of the goods
• Price and VAT charged

Features of debit and credit notes

• The words debit / credit in a prominent place

• Name, address and VAT registration number of the supplier
• Name, address and VAT registration of the customer

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 • Date of issue
• Tax invoice number to which the debit or credit note relates
• Reason for the debit or credit note

Non claimable input tax

• VAT input cannot be claimed in the following instances

1. Entertainment
• Goods and services procured for the provision of supplies constituting
entertainment are denied input tax
• However, the following are exceptions:
i. Entertainment expenditure by a hospitality business
ii. Bona fide promotion expenditure made free of charge to business
clients or customers
iii. Food left overs which had initially been procured for making taxable
supplies of entertainment and are finally given to employees
iv. Travelling and subsistence given to employees away overnight on
business of the employer or partnership which is refundable to the
employer if unspent
v. Meals or refreshments supplied by operators of taxable passenger
transport service.
vi. Goods or services of sport, recreational facilities or public amenities
acquired by a local authority or charitable organisation for the
provision of entertainment to the public
2. Passenger motor vehicles
• An operator cannot claim input tax on the cost of acquiring or hiring a motor
vehicle
• The following are however exceptions
i. Input tax on running expenses such as insurance, maintenance of
the PMV
ii. Input tax on modification or installation costs after the PMV has
been delivered
iii. Input tax on acquisition or hiring costs on motor vehicles other than
PMV used to produce taxable supplies

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 iv. Input tax incurred by a taxpayer on a PMV acquired for
demonstration purposes or for temporary use prior to a taxable use
by such a registered operator

Illustration 04

Sett (pvt) Ltd, a registered operator acquired a fiscal device for $200 000

Required

Explain how the item will be treated for tax purposes

Illustration 05

Smartair (Pvt) Limited bought a Nissan double cab for use by its senior manager for $400
000. In the first year of use of the vehicle the company incurred the following expenses

Canopy $600 000

Fuel $620 000
Repairs $156 000
Insurance and licenses $320 000

Calculate the amount of input tax claimable by Smartair.

3. Exempt Supplies
• No input tax can be claimed on the acquisition of exempted goods or services
4. Subscriptions
• VAT input is not claimable on subscriptions paid for membership of a club,
association or society of a sporting or recreational character
• Operators can however claim input tax on subscriptions for magazines,
trade journals, membership of trade associations and bodies.
5. Medical services
• No input tax can be claimed because medical services are exempt supplies.

Input tax apportionment

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 • A full claim for input tax will be allowed if the acquired goods or services are used
90% in the production of taxable supplies
• In other instances VAT input may need to be apportioned after approval by the CG

Adjustments

• Adjustment will be necessary in the following circumstances:

1. Bad debts
2. Credit notes
3. Debit notes
4. Fringe benefits

Illustration 06

M (Pvt) Ltd, a category A operator sold goods amounting to $222 000 including VAT and
properly accounted for output tax on the supply. The client then paid $200 000 and
absconded. All efforts to trace the client were fruitless and the debt became irrecoverable
and was written off.

Required

Calculate the input tax claimable

Illustration 07

Calculate the VAT liability for Premier Ltd, a category C VAT registered operator, which
availed the free use of a Mercedes Benz E322 with an engine capacity of 3200 cc to its
MD.

• A supply is not deemed to have taken place if the goods or services in the
question are ordinarily exempted or zero rated
• The following are the benefits that are not chargeable to output tax
1. Provision of residential accommodation
2. Provision of loans
3. Provision of zero rated items e basic food such as bread, sugar etc.
4. Provision of entertainment e.g., supply of free meals

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 5. Motor vehicle supplied to an employee by an exempt supplier e.g., an
educational institution

Illustration 08

S Ltd produces retail sweets and sweet products. The company’s gross revenue and
operating expenses for the year ended 31 December 2021 were as follows:

$
Sales-Local 1 300 000
Sales- exports 800 000
Raw material purchased 520 000
Utility costs 38 000
Motor vehicle expenses 20 000
Diesel for car 80 000
Petrol for truck 10 000
Staff food stuff 60 000
Salaries and wages 236 000
Consumables 40 600
Communication expenses 40 300

The figures are inclusive of VAT

The company’s senior managers have had free use of the following passenger motor
vehicles during the year.

Nissan Almera 1800cc

Mercedes Benz 2300cc
Ford Ranger 3300cc

Calculate potential VAT liability of S Ltd for the year 2021.

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Default penalty

• An operator who pays tax late may be liable to 100% penalty and 25% interest per
annum
• An attempt to evade tax will attract 200% additional tax

VAT Claim and refunds

• A refund arises when output tax is below input tax

• A refund can also arise where an operator has overpaid tax for an earlier period
• Input tax cannot be claimed in the following circumstances
i. Where a claim is made after six years from the date of the tax period
ii. Where the refund would unjustly enrich the taxpayer
iii. Where the amount being claimed is $60.00 or less

Returns and payment of tax

• VAT should be computed and paid on the 25 th of the month following the end of the
tax period.
• If the 25th is a weekend or a public holiday, such returns shall be paid on the last
working day of the week before such a holiday or weekend.
• A VAT return (VAT 7) should be filed with ZIMRA by the 25 th of the next month
following the end of the tax period
• A late submission of VAT will attract a civil penalty of $300 per day up to 91 days

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