Chapter

chapter 16 The Trader’s Point of View

Author(s):
Alan Tait
Published Date:
June 1988
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Do not take for granted that because Customs and Excise is an official Government body it is right. This is not always the case.

—Ian Hills, VAT: A Working Guide for the Small Business

(London: Telegraph Publications, 1987), p. 90

Most discussion of VAT is about whether or not a government should introduce VAT or about the practical difficulties of administration. It is often forgotten that the other half of a successful tax depends on the trader’s reaction and that reaction depends, in part, on the businessman’s feelings about the costs to him of complying with the requirements of VAT.

This chapter looks at trader decisions in anticipation of VAT, problems of compliance costs, invoices, pricing, profit margins, bookkeeping, and visits from VAT officials, and the need to review company decisions for their possible implications for VAT.

The Trader’s Anticipation of VAT

Traders have an obligation to find out whether they should register and to register if necessary. They should receive an educational visit from an official of their local VAT office and this should form the basis for reasonable working relationships at the district level.

Before the VAT has started, or in opening a new business under a VAT regime, registered traders should anticipate the tax and consider whether or not the following should be taken into account.1

  • Appoint a senior staff member to ensure that things get done at the right time and in the right order to prepare for VAT; this staff member should be responsible for training staff at all levels to understand VAT and how it may change their work in-house, with suppliers, and with customers (for example, in a retail store, the paperwork needed to reimburse tourists for the VAT on their purchases).

  • Review the accounting system to ensure that it creates the proper and convenient entries for VAT returns.

  • Review and modify, if necessary, existing stationery, especially the design of “tax invoices” for the supply of goods and services. Arrange for printing new forms well in advance as many others may be making similar demands on printing.

  • Modify cash registers.

  • Modify computer programs.

  • Identify the activities, transactions, and categories of revenue and expenditure for which VAT could have implications. For instance, separate records will have to be kept of sales at different rates of VAT.

  • Identify the precise stage at which VAT applies to each type of supply.

  • Determine whether or not some activities are eligible to use the “cash” option for VAT instead of the invoice (accounts) basis; if the option is available, evaluate which is the most advantageous.

  • Determine whether a change in the accounting period is needed to satisfy the requirements of VAT.

  • If an activity is conducted by a company that is part of a group for income tax purposes, determine whether (in the light of administration and cash flow) it should register separately or whether the group should register.

  • Depending on the taxation of stocks and capital goods under the earlier sales tax and the transitional provisions for reimbursement, decide whether such purchases should be advanced or delayed.

  • Assess whether VAT will have any effect on contract obligations.

  • Ensure that marketing personnel understand the basis for price displays on price tags, price cards, and in advertisements (see below and the discussions of “Discounts” and “Credit” in Chapter 17).

  • Review any possible advantages from in-house provision of “exempt” services.

  • Carefully review the firm’s cash flow position, remembering that though liquidity may be improved (because stocks bear no VAT), the VAT is due to the authorities whether or not the cash has been received from the customer. Failure to pay VAT promptly can have serious financial consequences in many countries as severe automatic penalties may be incurred.

Compliance Costs

What are the compliance costs for a business fulfilling its obligations under VAT? Most businessmen do not actually compute what it costs them to comply with government requirements; they just know it costs money and they resent it. Even before the VAT was introduced in New Zealand “by far the most widespread concern about the proposed form of GST [VAT] relate[d] to a perception that it will impose very heavy costs on those obliged to account for the tax.”2 In the United Kingdom in 1985, VAT was considered the most serious officially created burden on business; twice as serious as the next tax problem (PAYE).3

To estimate VAT compliance costs needs an evaluation of the size and costs of the resources committed to VAT work within the business. This includes the wages and salaries and fringe benefits of full- or part-time workers involved with the tax, including accounting, clerical, and sales staff. The overhead costs (office space, depreciation, utilities, and so on) of the employees should also be costed, as should computer hardware, software, time, other equipment and supplies, and any outside advice contracted. Of course, the real costs of all this is what these people and productive capacity could have earned the company had they not been dealing with VAT; but usually it is just their market cost that is computed.

Against these costs there may be offsetting benefits. Smaller firms may be obliged to keep better records than they would have kept without VAT. This may improve their management and decision making. Some businesses may gain a cash-flow benefit. Usually traders collect more VAT on sales than they pay on purchases. They will, therefore, enjoy a cash-flow benefit that will vary according to their relative sales and purchases, their commercial credit periods, and the proportion of annual VAT payments held on average throughout the year.4 For example, a large retailer selling mainly for cash but enjoying, say, a three-month credit from suppliers, would do very well indeed. Others, selling on credit and getting little supplier credit (typical of smaller firms) would not gain this advantage. The scale of advantage depends on the interest rate and, of course, the gain is not to the economy, but only represents an interest-free loan from the authorities to the traders or perhaps another tax on consumers.

These advantages are undoubtedly real but, in most cases, are not included in survey assessments.5 However, their scale is well exemplified in Table 16-1, which shows net (after offsetting cash flow benefits, but not management benefits) compliance costs for the United Kingdom halving the gross compliance costs in 1984/85.

Table 16-1.Sales Tax Compliance Cost Studies
StudyYearCountryTax

Surveyed
Sample

Size
Replies

Used
Compliance Costs

as Percentage of Tax
GrossNet
Sandford11984/85United KingdomVAT3,00025.12.3
Sandford11980/81United KingdomVAT3,00024.80.8
Sandford/Godwin31977/78United KingdomVAT9,0942,7999.37.6
Godwin41973/74United KingdomVAT682921–28
Yocum51960UnitedStatesRetail sales7.6
Matthews61957UnitedStatesRetail sales775.4
Haig71934UnitedStatesRetail sales1,6001633.7

Cedric Sandford, “The Costs of Paying Tax,” Accountancy (London), June 1986, pp. 108–11.

1984/85 estimates from an update of the 1977/78 survey.

Cedric Sandford, Michael R. Godwin, Peter J. W. Hardwick, and M. I. Butterworth, Costs and Benefits of VAT (London: Heinemann Educational Books, 1981).

Michael Godwin, “VAT Compliance Costs to the Independent Retailers,” Accountancy (London), September 1976, pp. 48–60.

James C. Yocum, Retailers’ Costs of Sales Tax Collection in Ohio, Bureau of Business Research Monograph No. 100 (Columbus, Ohio: Bureau of Business Research, College of Commerce and Administration, Ohio State University, 1961).

Milton P. Matthews, A Measurement of the Cost of Collecting Sales Tax Monies in Selected Retail Stores (Salt Lake City, Utah: Bureau of Economic and Business Research, University of Utah, 1957).

Robert M. Haig, “The Cost to Business Concerns of Compliance with Tax Laws,” Management Review (New York), November 1935, pp. 323–33.

Cedric Sandford, “The Costs of Paying Tax,” Accountancy (London), June 1986, pp. 108–11.

1984/85 estimates from an update of the 1977/78 survey.

Cedric Sandford, Michael R. Godwin, Peter J. W. Hardwick, and M. I. Butterworth, Costs and Benefits of VAT (London: Heinemann Educational Books, 1981).

Michael Godwin, “VAT Compliance Costs to the Independent Retailers,” Accountancy (London), September 1976, pp. 48–60.

James C. Yocum, Retailers’ Costs of Sales Tax Collection in Ohio, Bureau of Business Research Monograph No. 100 (Columbus, Ohio: Bureau of Business Research, College of Commerce and Administration, Ohio State University, 1961).

Milton P. Matthews, A Measurement of the Cost of Collecting Sales Tax Monies in Selected Retail Stores (Salt Lake City, Utah: Bureau of Economic and Business Research, University of Utah, 1957).

Robert M. Haig, “The Cost to Business Concerns of Compliance with Tax Laws,” Management Review (New York), November 1935, pp. 323–33.

While traders’ compliance costs are undoubtedly real, they are also extremely difficult to assess. The only practical way to do so is to ask those involved to make an informed computation. Table 16-1 shows seven examples of such surveys of sales taxes. The results suggest that compliance costs can be between 3.7 percent and 30 percent of the sales taxes paid. The highest costs were associated with an extremely small sample of retailers paying VAT during the year the tax was introduced and it is hardly a general sample. Otherwise, the results suggest costs below 10 percent of taxes paid, lower costs for the retail sales tax, and small firms suffering higher (sometimes much higher) compliance costs than large firms.

Regrettably all such surveys suffer from the problem of self-selection of respondents producing a self-fulfilling prophecy. If you set out to ask a group by mail whether they are unhappy, it is likely that those who reply will be those that are sufficiently unhappy to take the trouble (and suffer the cost) of filling in the survey. The sample is automatically biased to weight heavily those who consider tax compliance to be a vexatious cost. To balance the results would require an implied weight to be assigned to those who did not reply; presumably these nonrespondents found the sales taxes to be insufficiently burdensome to make a fuss about. It is worth noting that in each case (except for the tiny face-to-face sample of Matthews) about two thirds of the sample were not used, largely because they did not respond. If, for example, a cost of 2 percent was attributed to these members, it could halve the 9 percent compliance costs of the 1978/79 U.K. VAT survey.

Not only is the sample self-selecting in that only those who are concerned respond but, presumably, those responding have an interest in assigning as much cost as possible to tax compliance. If the respondents think the results will be published, and presumably they cooperate in the hope that their complaints will encourage changes in the tax, then it is possible they think that the more they complain and the higher are the apparent compliance costs, the greater will be their impact on policy. So not only is the sample selection likely to be biased, the replies themselves are likely to include a further bias.

It is difficult to know what to make of this debate. Perhaps it is best if it is recognized that these costs do exist and they can be important, especially to smaller businesses. The VAT administration should be aware of them and should do as much as possible to mitigate them.

The Invoice

General

Having anticipated VAT and registered, what other concerns about VAT does the trader have? He must usually keep a number of records, including normal accounting records; a VAT account; sequentially numbered sales invoices; purchase invoices; and import and export documents.

The authorities might also require other information to be kept, for example, stock control sheets. However, invoices are the most important documents, and examining agents place great store in the availability (or absence) of invoices.

The invoice is the crucial control document in all existing VATs. The requirement to issue invoices, showing the VAT liability, should impose little extra obligation on most businesses as the recording of sales and purchases is part of the normal accounting system of any business that has a proper system of bookkeeping. Accuracy in such records is essential for the financial control of the business. However, in some countries, such as in Indonesia before the introduction of VAT, enterprises did submit a sales tax return showing how their tax liability was computed, but there was no specific stipulation that an invoice had to be issued for tax purposes. This could put the country at a disadvantage compared to others when introducing a VAT.

The directives of the EC specify that taxable persons must issue invoices for all supplies of goods and services to other taxable persons. The requirements in relation to invoices are emphatic: every invoice must show, among other particulars, the price of the goods or services exclusive of VAT and the corresponding amount of VAT. Under the laws of various countries, the purchaser is not entitled to any credit if the tax is not clearly and correctly shown on the invoice. In this lies the control nature of the invoice as an instrument of tax enforcement. The system does not envisage the compulsory issue of invoices showing tax at the retail level or indeed in any transaction other than one between two registered taxpayers.

Since the invoice is not relevant in relation to imports, the appropriate customs form for certifying payment of VAT constitutes the control document for the purposes of a claim to tax credit.

The laws of different countries lay down specific requirements, including a time limit for the issue of invoices, credit notes, and related documents, and these should be strictly applied. A taxpayer must be aware that if he issues an invoice stating a greater amount of tax than is correct for the transaction, he is liable for the whole amount of tax invoiced and may also be liable to penalties. Buyers should not be allowed to take credit for any VAT that proves to be overstated. The VAT law precludes an unregistered person from issuing an invoice and if he issues an invoice showing an amount of tax he is liable for the amount shown. He also leaves himself open to penalties.

None of the European countries requires the use of an official form of invoice. In fact, in all of them, the tax authorities have been ready to meet the convenience of businessmen by accepting as valid documents for tax credit purposes any piece of paper that is in use commercially and that contains the appropriate information required on a VAT invoice. In the case of small sales, simplified forms of invoices are accepted. However, in Taiwan Province of China, traders in goods and services are obliged to issue uniform invoices. These invoices are printed and sold by the authorities. Enterprises can be authorized to print their own invoices, provided they are approved by the Ministry of Finance. In some countries, small-scale traders are exempted from this requirement and just issue ordinary receipts.6 However, in most countries the tax authorities are authorized to issue regulations for the issue of simplified invoices in certain circumstances, for example, in relation to passenger transport, agricultural markets, and cash-and-carry wholesalers. But note that because of potential VAT evasion through cash-and-carry sales, there are usually regulations to require such traders to ensure that their till rolls show a product code clearly identifying the different classes of goods. In addition, the till roll must be prepared to show all the details required on a VAT invoice and, of course, till rolls must be kept for the full statutory time.

Failure to issue a tax invoice, where the law requires it, or the issue of an invoice falsifying the amount of the consideration strikes at the foundation of any VAT system. It is treated as a highly serious offense, and the penalties applicable to it are likely to match its gravity.

Question of Issuing Receipts to Final Consumers

No European country requires invoices for sales by retailers, but a VAT invoice may be issued by a taxable retailer when asked to do so by a taxable customer.

In Belgium, suppliers of certain services are required to issue officially approved receipts numbered consecutively for all transactions with final consumers. Hotels, restaurants, garages, car wash businesses, and building construction come under this rule. A similar requirement in relation to certain services exists in a few other countries.

In a country in which the legal requirements to issue documentation to final consumers has been consistently ignored by many retailers and the bookkeeping standards are poor, the tax authorities are faced with two alternative courses of action. On one hand, they can commit themselves to raising bookkeeping standards and building up an effective and efficient audit force. On the other, they can try to enforce the requirement that simplified tax invoices be issued to final consumers (for example, in Latin America and Turkey), in the hope that consumers will ultimately be transformed into auxiliary tax officials. (In reality, this is a pious hope because consumers also see themselves as benefiting from the tax evasion.) If the choice is the second, valuable administrative resources will be diverted to profitless pursuits instead of carrying out effective audit programs that are the key to proper VAT control. Traders should try to influence the tax authorities to discourage such a course of action. Small and, indeed, many medium-sized retailers have sufficient difficulty in mastering the essentials of VAT, without the additional and unnecessary complication of documentation to final consumers. In an exercise of give and take, which will be of considerable expense to the government and must exert a serious upward push on costs, it is better to avoid multiplying the vexatious meetings between traders and VAT officials.

The position as regards services is, however, different. Suppliers of certain services with high added value, such as restaurants, garages, building contractors, and allied traders, are often required to issue receipts with printed consecutive numbers in books approved by the tax authorities. The totals for each day’s receipts can be entered in the sales book from the trader’s own copies of the receipts, which would be the only ones apart from those given to the customers. The tax auditor checks the receipts against the cash book entries and assesses their reliability from the general nature of the business, the stock carried, number of employees, and other criteria.

Pricing

Some countries require the VAT content of a price to be shown clearly and separately from the tax-free price so that the buyer is fully aware of his tax liability. Others claim that buyers want to know the full cost of a good including tax and do not wish to be faced with an additional impost at the till. “Members of the general public may not want to know the exact amount of tax included in each item purchased, they will usually want to know the all up price (including [VAT]) before taking the item to the counter or check out.”7 The New Zealand authorities specified that prices could be shown for a $99 item inclusive of VAT as:

  • $99.00, or

  • $99.00 (including VAT), or

  • $90.00 + $9.00 = $99.00, or

  • $90.00 + $9.00 (VAT) = $99.00;

  • $90.00 + $9.00 (VAT) = $99.00;

but what would not be acceptable were the following:

  • $90.00, or

  • $90.00 (excluding vat), or

  • $90.00 + VAT.

Every country has its own priorities, but traders must be clear about what discretion they have and make the appropriate adjustments to their price tags and price lists. What happens when this is not anticipated is well exemplified by the case of Greece. “Last week Greece’s entire retail sector slowed down as merchants grappled with the new and confusing set of VAT rates. . . . So befuddled were many Greek shopkeepers that 1,500 government officials had to fan out through the country to help them compute prices.”8

Profit Margins

Sometimes traders set their profit margins on an “into-store” cost. This may or may not include any tax element levied before VAT. With a single-stage tax (say, at the manufacturing level), retailers are quite likely to include the tax element in their base for markup. However, under VAT, the traders act as tax collectors and pass the tax forward fully to the final consumer and, unless traders adapt their practice when VAT is used, profit margins could be distorted.9

For example, Table 16-2 shows that if a trader originally (in Column 1) had a 50 percent markup on a purchase price, including a 10 percent sales tax, his selling price would have been $165.00 and his profits, if he considered himself as having paid the sales tax, $45.00. Under a VAT (Column 2), his purchase price will be liable to a VAT of $10.00, his markup remains the same, but his VAT liability is only $6.50 ($16.50 minus $10.00), and his profits after paying VAT rise to $48.50. However, if the trader under the old sales tax did not think of himself as paying the sales tax, his accounting gross profits would show $55.00, and the equivalent under VAT would be $48.50. To regain his $55.00 margin under VAT, he would have to raise his margin to (approximately) $62.00 (Column 3).

Table 16-2.Profit Margins and VAT(In U.S. dollars)
Single-Stage

Sales Tax

(1)
VAT

(2)
VAT

(3)
Cost of goods100100100
Plus sales tax at 10 percent101010
Into store cost110110110
Markup5555621
VAT7171
Selling price1651651721
Profit after sales tax (2)45491
Profit after sales tax (3)5549155
Source: See text.

Rounded.

Source: See text.

Rounded.

In each country, the pretax and post-tax profits will be different and will require careful consideration by each trader, taking into account all changes in relative prices. Of course, the tax revenue to the authorities will be quite different under two of the schemes in Table 16-2, but that simply exemplifies that here we are looking at the VAT from the trader’s point of view and not that of the revenue department.

Bookkeeping Requirements

Importance of Adequate Records for VAT

Under a VAT, the tax authorities are concerned not merely with the figures of sales by taxpayers and the relevant tax but also with the figures of purchases and their liability. To calculate a taxpayer’s VAT liability for a given period, there must be adequate records of both purchases and sales. The bookkeeping requirements for the trader can, however, be quite simple (see below), but the existence of more than two rates introduces an element of complexity and even more so if the number of rates exceeds two or three.

Link Between Invoices and Bookkeeping

There is a close link between the proper use of invoices for VAT purposes and the maintenance of a satisfactory system of bookkeeping, because the most essential factor in an adequate system of bookkeeping for VAT is the recording in a systematic way of all invoices of purchases and also all invoices of sales to taxable persons.

Main Bookkeeping Requirements for VAT

Both the directives of the EC and the laws of the various countries establish that chargeable persons must maintain a sufficiently detailed system of bookkeeping to allow VAT to be levied and checked by the tax administration. These requirements, as set out below, should apply to any taxpayer under a VAT except for small traders allowed to keep simplified accounts.

Every taxable person must keep records of all taxable goods and services he receives or supplies in the course of business, distinguishing between taxable transactions liable at different rates of tax, as well as any taxable self-supplies and goods applied to personal use. Such entries should be cross-referenced to relevant sales documents. He must also keep a record of all exempt supplies that he makes or receives. It may be inappropriate to clutter books of account with self-supplies; many VAT authorities allow taxpayers to estimate their self-supplies at the end of the year and make an annual adjustment.

The records must be in sufficient detail to allow the taxpayer to calculate correctly the amount of VAT that he has to pay or can reclaim, and to complete the necessary returns. He must also keep them in a form that enables the tax authorities to check the completeness and accuracy of the VAT returns. Records and accounts do not have to be prepared in any special form, but if they are not regarded as satisfactory, the tax authorities may direct a businessman to make the necessary changes. Records and accounts have to be maintained up to date, and preserved with all relevant papers (such as orders, invoices, delivery notes, and correspondence) and other documents pertaining to the business (such as trading accounts, profit and loss accounts, and balance sheets) for a period that varies according to the law of the different countries.

In developing countries, and for small traders generally, the authorities would expect a sales book and a purchase book shown in Examples I and II.

Example I:Sales Book
DateSellerItemsSales

Invoice

Number
Transactions

Contents1
Sale
AmountVAT

Amount
(1)(2)(3)(4)(5)(6)(7)

In Column 5, quantity, unit price, and other necessary matters should be recorded.

In Column 5, quantity, unit price, and other necessary matters should be recorded.

Usually, traders should keep separate purchase and sales books (or separate pages in a single book for a small trader). Usual bookkeeping requires an order day book (that is, a daily record of all invoices received and cash payments made).

For retailers, a simple form of a purchase book and a sales book would be adequate. Something on the lines of Example II would suit a mixed business with chargeable and exempt sales. It would also suit a business handling taxable goods only.

Example II:Purchase Book
DateSupplierInvoice

Number
Purchase
TaxableExempt
AmountVAT
(1)(2)(3)(4)(5)(6)

The invoices for taxable and exempt supplies should be numbered consecutively in separate series. If no invoice is received for exempt goods, a pro forma invoice should be prepared and numbered. All invoices should be filed safely for audit reference if needed.

A trader engaged solely in taxable activities would have no entries in Column 6 in Example II. Purchases of goods and services “not for resale” should be specially indicated, so that at the appropriate time any necessary adjustment of input tax may be made for exempt activities.

In the case of retailers, the essential requirement for VAT is to get the correct total for each day’s sales (or receipts, if, as is usually permitted for retailers, a “receipts,” rather than a sales basis, may be used for arriving at output VAT).

To ensure reliable figures of takings, a balanced cash book would also have to be maintained and entered up each day.

Auditing the accounts of a retailer who maintains a purchase and a sales book and a balanced cash book on the lines indicated is a simple operation and, with a little experience, the tax auditor can quickly conclude whether or not honest records are being kept. The inconvenience to the trader is minimal. Innocent errors, especially at the initial stage, are dealt with usually by payment of the tax, plus a small administrative penalty. Of course, deliberate, carefully conceived fraud would involve the usual VAT penalties, depending on the seriousness of the offense.

Trader Relations with VAT Officials

Usually, VAT officials at three grade levels visit traders.

  • Officers, who are often young, newly recruited, personnel. They visit smaller establishments. They are not qualified accountants. However, they have been trained to audit for VAT and the more experienced will have a good knowledge of accounting practices.

  • Senior officers, in charge of a number of offices will usually visit larger traders with more complex accounting systems. Some may have additional qualifications specializing in computer accounting techniques. Others may develop special knowledge about particular trades and industries (for example, brewing, building).

  • Management officers, who manage local districts, check reports of their offices, and visit some of the traders.

Visits by officials can often trouble the trader whether or not he has anything to hide. Traders worry about whether VAT officers are experts in business affairs. “Few VAT officers have experience in actually running a business because they are career civil servants, although they are trained to be observers of business and draw reasonable conclusions. . . . There could be a communication problem because the VAT officer may not appreciate the way a business operates and its specialised terminology. Accordingly, VAT officers’ questions should generally be answered in the clearest possible language on the assumption that the officer has little understanding of the business.”10

Similarly, a trader may ask, “Why me?” when his premises are chosen for a visit from the VAT authorities. It is as well that a trader should know that an officer’s suspicions may have been alerted by a customer invoice with an error that suggested mistakes in the selling business, or an invoice may have been selected at random from another audit to be cross-checked in this trader’s business. Usually, of course, visits depend on the size and type of business and will be more frequent if officers have reason to believe something is wrong (persistent default, late returns, errors in returns, and so on).

To the question, “Should I have my tax advisor present during an inspection?” the answer sensibly is, “not usually”; however, if the authorities request a follow-up visit, then it probably pays to have a VAT specialist present because his presence ensures that the authorities “do not have complete freedom in placing their own interpretation on the law and on the way in which you do business. Once a VAT officer has made a decision, it is very difficult to get the ruling changed.”11

The trader should understand that the VAT officer on a routine visit is carrying out basic checks to verify the VAT returns submitted and to review the business to check on possible mistakes in categorizing goods and services or any signs of VAT evasion or fraud. The trader should anticipate that the VAT official may carry out some or all of the following credibility checks:12

  • Sampling batches of invoices to check that the correct rate of VAT has been charged.

  • Checking that invoices have been correctly posted to the VAT records.

  • Checking page totals.

  • Checking calculations relating to any special schemes, for example, small traders, building traders, hotels, and secondhand goods.

  • Spot checks on extra documents such as bank statements and sales correspondence.

  • Testing purchases (especially for retailers) followed by checks to ensure that the sale was correctly recorded.

  • Checking till rolls and observing cash sales to make sure transactions are correctly entered.

  • “Comparing VAT returns with annual accounts, which may reveal that a cash difference has been added to sales in the profit and loss account to overcome a discrepancy between recorded cash expenditure and recorded cash income. [Officials] may infer from this that the outputs have been underde-clared on VAT returns and this may form the basis of a subsequent assessment.”13

  • Calculating the relationship between particular purchases and sales, for example, electricity consumed and sales, gasoline and taxi takings, gallons of water and average gallons per wash in a launderette.

  • Checking markups on purchases against sales returns for VAT. Such calculations can be contentious and traders can discuss with VAT officials the need to take account of different markups for different goods at different times of the year, stock losses, pilferage, inflation, and wastage.

It is also good advice for traders to make notes about the visit of VAT officials, so that the discussions and comments are recorded while they are fresh. It is also worth noting that a VAT officer’s advice is often not given in writing and as such need not be binding; if the trader suspects an error (for example, if he knows his competitors are paying VAT on sales on which he has just been told he need not), he should take the matter up officially with the VAT office.

Continuous Review For Potential VAT Ramifications

Traders can, in the normal course of business, make decisions that, unknowingly, create VAT liabilities. The mistakes are made through genuine ignorance, but they can be expensive.14 An example might be a multinational company that decides to fill suddenly created posts by seconding staff from its overseas affiliates; the VAT could be chargeable if the fees were paid to the affiliates, and an alternative way of contracting staff should have been used.

For example, “In many cases, it is possible, through careful planning, to ensure that management changes actually improve the VAT position of the corporate group. Where, for instance, a partly exempt member makes a taxable supply of management services to a company which can recover the input VAT, it may increase the proportion of its own input VAT that can be recovered, depending upon its agreed partial exemption method.”15

The basic message is that the implications of business decisions for VAT liability should always be considered especially in the choice of new lines, asset sales, group treatment, overseas transactions, and intragroup transactions worldwide.

Many of these points on the New Zealand VAT were suggested in the article by Dodd (1986).

New Zealand, Report of the Advisory Panel on Goods and Sendees Tax to the Minister of Finance (1985, p. 31).

United Kingdom, Department of Trade and Industry (1985, p. 31).

In the United Kingdom, this would average 524 of the VAT they collect annually—made up from a three-month collection period with an average of one and a half month VAT, that is, 3/24, and the “grace” period of one month before tax is remitted equivalent to one month’s VAT, that is, 1/12 or 2/24.

For a good appraisal of the problems, see Sandford (1981, pp. 10–12) and (1986).

Jap (1986, pp.318).

New Zealand, GST Coordinating Office, Pricing & GST, pp. 2–3.

“A VAT Spat in Greece,” Newsweek (1987, p. 37).

New Zealand, GST Coordinating Office, Pricing & GST, p. 6.

From a good series of responses to possible traders’ questions in Somerville and Arnold (1985, p. 20).

Somerville and Arnold (1985, p. 28).

See the interesting account in Buckett (1986, Chap. 3 and pp. 64—65).

Buckett (1986, p. 64).

Buckett (1986, pp. 11–16).

“See VAT: Avoidance Methods on Management Charges,” International Tax Report (1985, p. 10).

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