VAT is an indirect tax applied upon the consumption of most goods and services. VAT is levied by VAT registered businesses which make supplies of goods and services in the course or furtherance of their business. VAT will also apply on the importation of goods.
VAT is levied at each stage in the supply chain and is collected by businesses on behalf of the Government. VAT is ultimately incurred and paid by the end consumer. Although VAT will apply to most goods and services there are some likely exceptions: this includes basic food items, essential medicines, and exports of goods and international services which are expected to be zero-rated supplies.
Furthermore other supplies such as healthcare, education, sale or lease of residential property and finance and insurance are expected to be exempt from the VAT.
VAT registered businesses charge and add VAT to the value of goods and services they supply. Such businesses can also reclaim VAT incurred on goods and services acquired for business purposes (subject to some restrictions) such as the purchase of raw materials and other consumables used for the purposes of business.
To explain how VAT works we have provided a simple, illustrative example below (based on a VAT rate of 5%):
The expected date for VAT implementation is 1st January 2018. Given your business’ complexity and volume of business transactions, it could take you a substantial amount of time to evaluate and map your business transactions.This is a critical step in your implementation project and it is something that can be started prior to the legislation.
Also, reviewing existing systems would help you anticipate the size of the changes and efforts required.
Generally, an exempt supply means that you will not charge VAT to your customer. Similarly, any VAT incurred on those purchases will not be claimable. Wholly exempt businesses will not be entitled to register for VAT nor claim any VAT incurred on their purchases.
Partially exempt businesses (i.e. mixed business) will be able to register for VAT and claim those expenses to the extent that it is incurred for the making of taxable supplies. This will mean that VAT incurred on common costs and general overheads (such as marketing and promotional expenses, utilities, professional fees, purchases of office furniture) will not be fully claimable and must be apportioned.
If nothing is done, there is a serious risk that your current business methodology will not be compliant with the new legislation. Furthermore, you might not be able to submit a complete and accurate VAT return in a timely manner.
Non-compliance could lead to penalties or prosecution, whichever applies.
Prior to making any changes to your IT system, you would need to identify the VAT implications based on your current business model. As the system will need to be configured at the transactional level, the appropriate VAT treatment must first be determined before you can proceed with any data entry and/or system configuration. Also, you will need to assess the business processes changes required, which are associated with the VAT requirements.