VAT: Irrecoverable Debts And Clawback Adjustment
A vendor registered on the invoice basis can deduct input tax in respect of debts that have become irrecoverable. To claim the input tax, there must have been a taxable supply for a consideration in money and the vendor must have already accounted for the supply in a VAT return. The input vat adjustment is calculated by applying the tax fraction (15/115) to the amount actually written off.
There are some exceptions to the scope. The important exception that is scoped out is 100%-held group debts.
Where the vendor subsequently receives payment in respect of a debt written off as irrecoverable, the vendor must account for output tax on that payment in the tax period in which it is received.DEBTOR: IMPLICATIONS
A vendor that is registered for VAT on the invoice basis that acquires goods/ services can generally claim input tax credits in the tax period in which a valid tax invoice
is in place.
A VAT vendor that is registered for VAT on the invoice basis that fails to make payment within 12 months after the expiry of the tax period in which the deduction was made must account for an output tax adjustment to SARS calculated on the unpaid amount. Amendments to the VAT Act clarify that the value of supply (that is, output tax) is to be calculated by applying the tax fraction to the unpaid amount. There seemed to be some uncertainty as the Act previously read that the value of the output tax payable was equal to the unpaid amount.If the purchase price or a part thereof is only payable later in terms of an agreement in writing, then the 12-month period will start running from the end of the month in which payment should have been made per the agreement. Further, if the vendor is sequestrated, declared insolvent, enters into an arrangement under section 155 of the Companies Act or ceases to be a vendor within 12 months after the expiry of the tax period in which such deduction was made, the adjustment to output tax should be made at the time of the occurrence of such sequestration, declaration of insolvency or arrangement or immediately before ceasing to be a vendor. The output tax adjustment also does not apply to 100%-held group debts.
A vendor who has made the output tax adjustment may make an input tax deduction to the extent that any portion of the purchase price is paid at a later stage.
The VAT Act has an important built-in clawback rule which triggers an output tax adjustment for the debtor if the vendor fails to make payment within 12 months after the expiry of the tax period in which the deduction was made. Debtors that fail to pay their trade creditors for 12 months must carefully consider their potential output tax adjustment that may arise. This is particularly relevant and prevalent in the current economic environment, with the outbreak of COVID-19.
(Writer: Muneer Hassan CA(SA)
Tax Consultant, Senior Lecturer in Taxation at UJ and Lecturer on the Gauteng Board Course)