VAA as designed has major challenges
By Kevin Sukwe
Every month, KRA sends to tax payers with VAT obligations who file their return reports of inconsistent filing. These reports are sent via emails and are generated by Value Added Assessments (VAA). Many taxpayers have received and do receive emails generated by VAA setting out VAT inconsistencies accompanied by spreadsheets listing entries from a taxpayer’s VAT return. The questions you need to ask yourself are:
What are these inconsistencies? How do they arise? How are they amended if any? And how can a purchaser go about preventing their occurrences and recurrence? Having to respond to these emails or amending the returns can be stressful and expensive in terms of administrative costs and time spent reviewing the files.
This article is to explain in very simple terms to the tax payers some of the questions raised above and to ensure compliance which will go a long way to minimize the inconsistencies witnessed in the VAT claims by purchasers and corresponding sellers’ declarations. We first need to understand how the inconsistencies
VAA is a system based reconciliation tool that KRA uses with the objective of identifying nconsistencies between purchase and sales invoices declared in VAT returns. The tool then communicates the inconsistencies to both the buyer and the seller and raises an auto assessment on the buyer for any tax payable relating to the inconsistencies.
VAA is a system based reconciliation tool that KRA uses with the objective of identifying inconsistencies between purchase and sales invoices declared in VAT returns. The tool then communicates the inconsistencies to both the buyer and the seller and raises an auto assessment on the buyer for any tax payable relating to the inconsistencies.
The tool is expected to curb claiming fictitious and /or unsupported input tax by VAT registered persons
and thereby enhance compliance. In so doing the revenue authority will hopefully bring more registered
persons to the tax net. This system works in the following manner.
The VAA reconciles input tax details claimed by a registered person (the purchaser) in a tax period to the corresponding output tax details declared by the supplier (the seller).
If the inconsistency is not resolved within 15 days, an auto assessment is sent to the buyer. The buyer is expected to settle outstanding tax where he/she agrees to the assessment.
However, the buyer may object to the assessment where he/she does not agree to it. Should the Auto assessment be outstanding for another 30 days, the debt section will proceed to institute
An inconsistency arises in terms of different invoice numbers, different dates, different amounts among others as will be explained briefly. If the details declared by the sellers are similar to those claimed by the purchasers an inconsistency will not be reported and that is the correct position of VAT filing. However, there are certain circumstances that will prevent this from happening such as a legal requirement that a purchaser can claim an invoice up to six months from the date of the invoice. This is one of the weaknesses that the system by KRA must address and two, KRA tends to put the obligations on the purchasers and not the seller.
What then Causes VAT inconsistencies?
There are a number of reasons that would cause the VAT inconsistencies, these include but not limited to the following;
Different Invoice numbering
Organizations have unique way of numbering their invoices some to include letters, numbers and special
characters. When declaring output, the selling company should declare the full invoice number including all the characters. When a seller or a buyer omit some of the characters a mismatch will be witnessed.
The challenge with this case is that some organizations use downloaded information from their accounting softwares and upload into VAT return form. Some of these software cannot accommodate more characters in invoice numbering. For example, some suppliers have very long invoice numbers which don’t fit into the software forcing the accounting officers to use less characters as those in the sellers’ invoices unless entries are made manually.
Even in a case where an organization spools the VAT from its accounting software, it needs to edit
the entries and ensure the details are captured as they appear in the sellers’ invoices.
Invoices are dated when raised or when ETR receipts are generated. This acts as the point of sale. The
point of sale is the earlier of the payment date and the invoice date. VAT is due and payable on or before the 20th day of the month following the point of sale. Sellers should declare sales whether there is immediate payment or whether the payment has been deferred to a future date. VAT legislation however allows the purchasers to claim VAT within 6 months from the invoice date. VAA may however fail to capture the information on invoices claimed after several months within this permissible framework e.g seller may declare sales in the month the invoice is raised or sales are made but the purchaser may do so 3 or months later. When VAA generates a report 3 months later the seller’s invoice will not be
matched with the purchasers’ records. The question is, has the seller committed an offense? No.
Has the purchaser committed an offense? No. So at the tail end, what is KRA trying to achieve? I think the taxman should improve on this area to save the tax payer time. This increases unnecessary administrative burden on the tax payers. Purchases who receive invoices after 6 months should report them as uncalmable VAT.VAA system matches sales to purchases in the same month. The purchaser has up
to 6 months to claim the input but if it is not done in the month of sale invoice was issued and reported in the suppliers’ VAT return the system will generate a discrepancy notice where it is unable to make a direct match in the same month.
Bulk (Accumulated) reporting
vis-à-vis individual invoice reporting This is where the seller declares its sales to various clients as a lump sum. This is permitted by law only in cases where the sales are made to unregistered VAT purchases. For example, a supermarket cannot report all the PIN numbers of its customers many who are individual with no VAT obligations. When they make sells to the companies, these companies will quote the PIN number and relevant invoice details of their purchases from the Supermarket. The Supermarket on the other hand reported bundled sales. On generating the report, the purchaser’s invoices will not match any invoice from the sellers’ end. This creates inconsistency. There should be clear guidelines on which businesses to do bulk reporting and which one to restrain. Some sellers have adopted the system of reporting their output VAT without attaching the PINs of the purchasers whereas the purchasers themselves quote these invoices in claiming for VAT. This is an outright inconsistency.
KRA should come up with very clear guidelines on who should bundle its sales and who should not
and if the seller does and the purchasers does not how can VAA identify that fact.
Failure to declare sales or delay to declare sales
When the selling entity fail to declare sales it does not preclude the purchaser from claiming the input VAT. An inconsistency will arise in this case. This obligation of failure to declare output VAT should not be placed on the purchaser but the seller should answer directly to KRA. Some suppliers have the tendency of declaring sales when they receive payment from their clients because of bad experience they face with those clients who take several months to remit their payments. This is also another contentious area in VAT. Should sales be declared when invoices are paid or when an invoice is raised? People who are for the former are of the opinion that they go the extra mile of looking for finances including from banks to finance KRA yet they themselves are not being paid. KRA should adopt a system where a purchaser claims VAT on the invoices they have fully paid for and sellers likewise declare sales on receipt of payments.
Some sellers have adopted the system of reporting their output VAT without attaching the PINs of the purchasers whereas the purchasers themselves quote these invoices in claiming for VAT. This is an outright inconsistency. KRA should come up with very clear guidelines on who should bundle its sales and who should not and if the seller does and the purchasers does not how can VAA identify that fact.
An inconsistency can occur when either the seller undeclared or over declare the output VAT or when the
purchasers over claims or under claims the input. This normally occur when documents like credit
notes or debit notes are not properly utilized. When a credit note is issued it is important that both the supplier and purchaser uses it and references the relevant invoice details in the correct cells. Also when there is a discount or rebates these should be applied before VAT is charged.
Use of wrong documents
For the purpose of VAT consideration is given to invoices. Some officers may erroneously use
documents such as proforma invoices, delivery notes, order confirmations and quotations. These
are not permitted for the purpose of VAT. For VAT on imports use customs entry number. The invoices
must have ETR receipts or if they are system generated, the details of the ERT must be on the invoice.
VAA as designed has major challenges. It needs major modifications to address various challenges that
come by it, the main one being that the buyer could be punished for VAT inconsistencies due to the failure of the seller.
Kevin Sukwe is a member of ICPAK, currently working as an accountant with H.Young & co.(E.A) Limited.
He is also a part -time CPA trainer with Star College of Management Studies.