VAT penalties can cripple your business

Correspondent | Friday September 5, 2014 14:00

They are also entitled to offset the tax they suffer when they acquire goods and services for their business (input tax), against the output tax. Where output tax exceeds input tax, the registered person should pay VAT to BURS. A refund is claimable from BURS where input tax exceeds output tax.

Registered persons are required to file VAT returns, based on the VAT category that is allocated to them at the time of registration.

A VAT category determines the frequency at which a registered person is required to file VAT returns to BURS. Category A and B VAT registrants file VAT returns on bi-monthly intervals, whilst category C registrants file returns on a monthly basis.

VAT returns are required to be filed with BURS not later than the 25th day of the month following the end of a tax period. Where a return bears VAT payable, the VAT should be paid by the date of submitting the return. If a VAT registrant’s tax period ends on July 31, 2014, the VAT return would be due by August 25, 2014.

Section 26 of the Act empowers the Commissioner General to levy late-return submission penalties of 10% of the tax payable per month or P50 per day, whichever is greater. Part of a month, such as 4 days, is treated as a full month for the purposes of determining the VAT penalties.

This is arguably one of the heaviest penalties in the VAT Act, especially if the VAT payable is significant. If a VAT registrant submits a VAT return for the month of January 2014 on September 10, 2014, the penalty would be determined for the months of February 2014 to September 2014, inclusive.

If the VAT payable per that return is, say, P 10,000, the penalty would be P 8,000, being 10% of P10,000 multiplied by 8 months. In other instances, the VAT registrant may be required to pay a penalty equal to 100% of the tax payable, which is rather punitive. Note, however, that the late-submission penalty should in no instance exceed the tax payable per the VAT return.

Late-VAT submission penalties can at times be avoided by lodging an application for extension of time to submit the return. As long as just cause is shown, the Commissioner General may grant the requested extension.

Regardless of the fact that an extension has been requested or granted, VAT due should be paid in time to avoid late-payment interest of 1.5% per month. Part of a month is also regarded as a full month, for the purposes of determining the interest.

Prior to Octrober 4, 2013, there was no penalty that could be charged for late submission of such returns. The Act only provided for the levying of a fine of P 5, 000, upon conviction by a court of law, meaning that technically, BURS could not charge any penalty for late submission of such returns. However, with effect from the mentioned date, the late-submission of a nil or refund VAT return attracts a maximum penalty of P 5, 000.

Note that the P 5,000 penalty can be negotiated downwards, depending on one’s circumstances. Dormant businesses which are registered for VAT should still file returns, including nil returns, so as to avoid late-submission penalties. The Act also provides that the Commissioner General may levy a 200% penalty where tax is underpaid due to a misleading or false statement. A misleading or false statement may include filing an incorrect VAT return, when the registered person is fully aware that the return results in the underpayment of VAT.

This may happen in instances where a VAT registrant knowingly understates output tax. If BURS identifies the understatement, it will charge the 200% penalty accordingly, in addition to interest of 1.5% per month or part thereof.

This may also prompt BURS to institute a VAT audit. In some instances, a tax audit focusing on one tax-head such as VAT may end up spilling over to other tax-heads such as Corporate Tax, commonly known as ‘spin-off audits.’

We stated above that BURS charges late-return submission penalties as well as interest for late-payment of tax. Interestingly, section 33 of the Act also empowers the Commissioner General to charge a penalty for late ‘payment’ of tax. If this was actively implemented, it would result in two penalties being charged, over and above the late-payment interest, i.e. a late-return submission penalty and a late-payment penalty.

It is worth noting that BURS currently does not levy the late-payment penalty, which could otherwise cripple most businesses. Regardless of the leniency exercised by BURS in this regard, the VAT penalties are still heavy and can cripple one’s business, especially if the defaults persists for a long time.

It is clear that the Act provides for heavy VAT penalties and every registered person should put in place measures to avoid late-submission of returns and late-payment of VAT. Further, every registered person should ensure that VAT returns are thoroughly checked for correctness, before being lodged with BURS, to avoid the possibility of incurring penalties and interest.

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Disclaimer: The information contained in this article is of a general nature and is not meant to address particular circumstances of any person. KPMG does not accept legal liability for any loss occasioned through the reliance of information contained in this article.