This chapter identifies those situations in which a vendor will be required to make adjustments to input tax or output tax. It explains when the adjustments should be made by the vendor and what the amounts of the adjustments should be.
Adjustments to input tax or output tax will arise in respect of taxable supplies, for example, where –
- an irrecoverable debt is written off by a vendor;
- a debit or credit note is issued or received by a vendor;
- early payment of an account gives rise to a prompt settlement discount;
- faulty goods received by the customer are returned to the supplier; and
- a change in the extent of taxable use or application of goods or services occurs.
15.2 IRRECOVERABLE DEBTS
A vendor who accounts for VAT on the invoice basis may deduct input tax in respect of debts which have become irrecoverable. In the exceptional case of a vendor who is registered on the payments basis and who has already accounted for a taxable supply which was paid with a cheque and the cheque is dishonoured, that vendor may also deduct input tax. The circumstances under which such a deduction may be claimed, requires firstly that there must have been a taxable supply for a consideration in money. Secondly, the vendor must already have accounted for the supply in a VAT return. Only then is that vendor entitled to make an input tax adjustment. The adjustment is calculated by applying the tax fraction (14/114) to the amount actually written off as input tax.
A debt will be considered as irrecoverable if both the following requirements have been complied with, namely:
- The vendor must have done all the necessary entries in the accounting system to record that the amount has been written off.
- The vendor must have ceased active recovery action on the debt or handed the debt over to an attorney or debt collector.
The vendor may then make an input tax deduction in the tax period in which both of the abovementioned requirements have been met. In the case where the vendor subsequently receives payment in respect of a debt written off as irrecoverable, the vendor must account for output tax on the payment in the tax period in which the payment is received.