Bad Debt, VAT Perspective
The business environment is quite challenging which necessitate companies to offer credit to their clients in order to literally stay in business. The credit line given to clients is just 30 days but it’s obvious that most companies do not meet their terms of payment and debts linger on sometimes beyond 90days.
On the other hand, the Value Added Tax Act 2013 ACT 870 requires companies to account and file their VAT returns for the previous month. In other words, the Act gives only a 30 days credit after which you are obligated to file your returns for that month whether customers have made payment or not. .
An important question that needs to be answered is how to treat the VAT component on debts that have been written off, of which VAT had earlier been filed and paid. .
Section 46 of the VAT ACT provides a detailed guidance on this grey area for which companies can take advantage of: .
Where a taxable person issues a tax invoice for a supply of taxable goods or services and the whole or part of the consideration for the supply was not received by the taxable person, the taxable person may deduct input tax under section 48 for tax paid in respect of the taxable supply that is subsequently treated as a bad debt. .
However, this is available only if the taxable person satisfies the Commissioner General that reasonable efforts have been made to recover the amount due and had not been successful. .
Bad Debt is really a major challenge for most businesses and instead of paying the VAT on these goods and subsequently writing it off due to non-payment, there is a brighter side. You can claim the VAT component of these debts as input tax and this can be a significant tax savings depending on your situation. Additionally, the debt excluding VAT can also be a deductible expense when the conditions are met. .
Richard Dwumor He is the Managing Partner at RDK Consulting, a professional services firm which engages in audit, tax and advisory services. Richard is a member of ACCA, ICA and he is a qualified Professional Chartered Tax Advisor. .
Disclaimer This is not a tax advice and readers are encouraged to seek the guidance of tax professional before making any decision.