Allow us to clarify and demonstrate why rent-to-buy schemes may prove to be VAT-inefficient for suppliers, per the current VAT Act. We are fully aware that the said Act is expected to be repealed and replaced with a modernised one and under the new Act, the VAT treatment of rent-to-buy schemes appears VAT-efficient; but we are not yet there. In this article, words importing the masculine shall be deemed to include the feminine.
A rent-to-buy deal is an agreement whereby a customer commits to rent an asset for a specific period before he takes ownership of the asset. Essentially, the rent is applied towards the price of the asset up until the full purchase price, including any interest, is amortized. Looking at the other side of the coin, the seller remains the owner of the asset, enjoying rental income up until the full purchase price is paid. Now, the crux of the matter is on treatment and accounting of VAT by a VAT registered seller. Let us first have a look at the parameters of the law.
The VAT Act provides that VAT is triggered at a time ‘when an invoice for the supply is issued by the supplier or any payment for the supply is received, whichever is the earlier.’ Put differently, a registered person must include a supply of goods or services in his VAT return and calculate VAT if he either receives a payment (whether in part or full) for that supply or when he issues an invoice. This general rule applies to every supply of goods and services unless varied with another VAT provision specifically addressing that transaction.
The above provision of the law simply points out the fact that VAT is triggered by the initial occurrence of either of the two events i.e., when a supplier issues an invoice before receiving a payment or when a supplier receives any payment before issuing an invoice.
If a supplier issues an invoice, he is required to account for the full VAT in that particular month or tax period regardless of whether the payment is received or not. The Act states that VAT is triggered when ‘any payment is received’ and if you look at this closely, it is apparent that the full VAT becomes due and payable even when the supplier receives a portion or part of the full purchase price.
The VAT squeeze
To put everything into perspective, let us assume that one Tiro acquired a house from ABC Houses worth P1 140 000 (including VAT of P 140 000) through a rent-to-buy arrangement where he pays monthly rent of P35 000 over 36 months. ABC is required to pay the full VAT of P140,000 to BURS on the date of receipt of the first instalment of P 35 000, i.e., regardless of the fact that Tiro is paying monthly instalments. Technically, the seller is required to fund the VAT payment from other sources of income which might not be efficient for the operations of the business. Now, imagine if the seller sells 10 houses of the same value under the same arrangement, it will be required to fund a VAT payment of P1,400,000 from its own coffers because he offers rent-to-buy arrangements.
Well folks, we hope that was insightful. As us, the two Yours Truly say goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax Whatsapp group, send us a text on the cell number below.