Basically, cash is considered as the life blood of every business.
Essentially, this means that a business needs to be generating enough cash to meet its operational obligations which include, inter alia, expenses, taxes, etc. In this regard, business operators strive to ensure that their cashflows are enough to meet their obligations. However, some business operators, tend to fall in a ‘catch 22’ position when it’s time to settle tax obligations, particularly Value Added Tax (VAT). Mostly, operators fund the VAT payments from other business sources due to the timing difference between late payments by customers and the VAT due date. This technically results in situation where businesses are pressured to finance the VAT payment from other sources, a situation technically described as a VAT squeeze. In this article, words importing the masculine shall be deemed to include the feminine.
As alluded to above, the VAT squeeze is technically a result of the timing difference in the payments from debtors and VAT due dates. In most cases, business operators who sell products on credit generally depend on the promptness of customer payments to ensure they cash position fit to meet operational obligations. More often than not, small to medium businesses with limited cash resources usually struggle to meet VAT obligations on time. This is mainly due to late paying debtors. For example, if Tiro’s credit customers fail to pay before the 25th of the month following a sale, he will be required to fund the VAT obligation from his personal savings. However, Tiro may be able to escape the VAT squeeze if he asks customers for a deposit and the customers pay the remainder in accordance with the credit terms. Let us have a look at why a deposit may be the best bet.
Generally, a deposit resembles a pledge to conclude a transaction at a later date or simply a reservation fee to secure a product or service. So how does a deposit solve the VAT squeeze when we all know that VAT is triggered on the earlier of either issuance of an invoice or receipt of any payment? To clarify this haze, it is of paramount importance that we understand the fact that in terms of the VAT laws, a deposit does not qualify as a payment for a product until the time it is applied or utilised towards the purchase price. In other words, a deposit is simply customer’s money held by the seller until the customer makes a purchase. Technically, this means a deposit changes character to become a payment of goods or services at the time the customer makes or confirms the purchase, and it is then applied to amortize the purchase price. Accordingly, VAT is triggered at the time the deposit is applied to the purchase and not on receipt.
Request for a deposit!
Having emphatically deciphered the VAT treatment of deposits, it is without a question that a business operator may actually prefund VAT obligations by simply requesting for deposits. Therefore, instead of issuing a tax invoice first and then chasing for payment, a business can avoid the VAT squeeze by requesting for deposits upfront. That will allow it to avoid the VAT squeeze. The VAT squeeze has to be avoided as BURS charges late payment interest of around 20 percent per annum or 1.5 percent per month, compounded monthly. In that regard, it is always best to avoid submitting returns without the cash with which to extinguish the VAT obligation to BURS.
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 consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send us a text on the cell number below. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.