VAT change ‘causes headache’ for govt suppliers

It was all smiles for suppliers to the government of Uganda to hear of an amendment to the Value Added Tax (VAT) Act that allowed them to account for VAT on cash basis. 

Previously, suppliers to government were required to account for VAT at the time they invoiced for the taxable supplies made even when payment had not been received. Only persons with taxable supplies not exceeding Shs500 million in annual revenue were eligible to use the cash method for purposes of accounting for VAT regardless of who they supplied to.
  
Given the long delays of payment from government, it meant that a supplier’s cashflows were heavily affected as they had to fund VAT payments to Uganda Revenue Authority (URA), sometimes borrowing from banks to finance the VAT payments. 
 
Subsequently, effective July 1st 2022, an amendment to Section 26 of the VAT Act was introduced to permit suppliers to government to account for VAT on cash basis as a partial remedy to the perennial challenge of government delaying supplier payments.
 
Several practical questions arise from the amendment:

• Given that invoices are now issued via URA’s Electronic Fiscal Receipting and Invoicing Solution (EFRIS), how should invoices be declared in the VAT return when payment has not yet been received? 
• How should a supplier declare VAT incurred on its purchases and expenses when payment has not yet been made? 
• What criteria should a supplier use to determine if its customer qualifies as “government”? 

For VAT return to be uploaded on the URA portal, all sales within EFRIS must be declared, an amendment to the VAT return was made to ensure that suppliers to government only account for output tax on payments received from government. 

This implies that suppliers should conduct and maintain reconciliations which track payments received from government versus invoices issued to ensure that VAT on sales is correctly declared in the VAT return to avoid interest and penalties arising from late payment of VAT. 

The VAT law requires that a person accounting for VAT on cash basis should also claim VAT charged on their purchases and expenses only when they have paid for them. Therefore, government suppliers using cash basis accounting for VAT should also track invoices on purchases and expenses versus amount paid and only claim input VAT on costs that have been paid. 

Where a supplier has government and non-government customers and the VAT incurred on purchases or expenses cannot be directly attributed to a government or non-government supply, the VAT law is silent on whether the VAT incurred should be claimed on cash or accrual basis. 

The amendment does not guide on the definition of “government”. Suppliers to public entities such as NSSF, URA and UETCL among others could argue that they are government suppliers. Another argument is government is only restricted to ministries, departments and agencies. 

According to Black’s Law Dictionary, “Government” is defined as the framework of political institutions, departments, and offices, by means of which the executive, judicial, legislative, and administrative business of the state is carried on.
Given this definition, all public entities could be considered as government. URA is yet to clarify on which institutions qualify as “government” for VAT purposes. 

While the amendment is a welcome relief, suppliers to government ought to consider the practical implementation aspects and obtain clarification from URA on areas that are unclear. Clarity in the law is necessary to ensure certainty of treatment by both taxpayers and URA.

The author is a senior tax advisor.