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Thread: VAT disallowed on liquidated debtor

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    VAT disallowed on liquidated debtor

    Hi

    I am new to this forum and wonder whether any of the members can possibly assist?

    SARS has disallowed vat claimed on a liquidated debtor in terms of Section 21 of the Vat act and listing as its objection that credit notes issued effectively cancel the supply. This despite the credit note clearly indicating that it is a bad debt, and providing SARS with the provisional liquidation order.

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    I've moved this to the tax forum where it's more likely to be seen by the right folk to advise.
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    Quote Originally Posted by Madgek View Post
    Hi

    I am new to this forum and wonder whether any of the members can possibly assist?

    SARS has disallowed vat claimed on a liquidated debtor in terms of Section 21 of the Vat act and listing as its objection that credit notes issued effectively cancel the supply. This despite the credit note clearly indicating that it is a bad debt, and providing SARS with the provisional liquidation order.
    Irrecoverable debts are not credit note events as envisaged in terms of section 21 of the VAT Act (i.e. you cannot issue a credit note in terms of the VAT Act in respect of bad debts that have been written off).

    Nonetheless, you are permitted to claim an input tax deduction in terms of section 16(3)(a)(v), read with section 22(1) of the VAT Act by applying the tax fraction (14/114) to the amount actually written off. The deduction may only be claimed if you have made a taxable supply of goods or services and accounted for the VAT in a previous VAT return.

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    Quote Originally Posted by bammer View Post
    Irrecoverable debts are not credit note events as envisaged in terms of section 21 of the VAT Act (i.e. you cannot issue a credit note in terms of the VAT Act in respect of bad debts that have been written off).

    Nonetheless, you are permitted to claim an input tax deduction in terms of section 16(3)(a)(v), read with section 22(1) of the VAT Act by applying the tax fraction (14/114) to the amount actually written off. The deduction may only be claimed if you have made a taxable supply of goods or services and accounted for the VAT in a previous VAT return.
    Hmm had forgotten this, simply because I no longer do the actual VAT form any more, and my auditor does it. If I am not mistaken, there is an entry on the form for Bad Debts, and also for Bad Debts recovered.
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    Vat Disallowed on Bad debt

    Quote Originally Posted by bammer View Post
    Irrecoverable debts are not credit note events as envisaged in terms of section 21 of the VAT Act (i.e. you cannot issue a credit note in terms of the VAT Act in respect of bad debts that have been written off).

    Nonetheless, you are permitted to claim an input tax deduction in terms of section 16(3)(a)(v), read with section 22(1) of the VAT Act by applying the tax fraction (14/114) to the amount actually written off. The deduction may only be claimed if you have made a taxable supply of goods or services and accounted for the VAT in a previous VAT return.
    The credit notes were issued against a "bad debt" debtor, did not reduce vat on the supply of goods, and was claimed for under "Adjustments - Bad debts".

    If I understand your comment correctly, credit notes should not have been issued at all, but adjustments made via journal entry?

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    Quote Originally Posted by Madgek View Post
    The credit notes were issued against a "bad debt" debtor, did not reduce vat on the supply of goods, and was claimed for under "Adjustments - Bad debts".

    If I understand your comment correctly, credit notes should not have been issued at all, but adjustments made via journal entry?
    That is correct.

    Note the following extracts from the attached VAT 404 - Guide for Vendors, which provides more detail in this regard (footnotes omitted):

    CHAPTER 14

    DEBIT & CREDIT NOTES

    14.1 INTRODUCTION
    A debit note will normally be issued by the supplier when the tax invoice for the supply has already been issued and the previously agreed consideration is subsequently increased. Conversely, a credit note will normally be issued by the supplier when the tax invoice for the supply has already been issued and the previously agreed consideration is subsequently reduced. A credit note is also issued by the original supplier when faulty goods are returned by the customer. Debit and credit notes therefore provide a mechanism to support the necessary VAT adjustments required or allowed where an event has the effect of altering the original consideration agreed upon for a past taxable supply, after the tax invoice has already been issued, or the vendor has accounted for the supply on a VAT return.

    14.2 WHEN MUST DEBIT AND CREDIT NOTES BE ISSUED?
    The following are the circumstances under which it will be necessary to issue a debit note or credit note:
    • A supply of goods or services is cancelled.
    • The nature of the supply of goods or services has been fundamentally varied or altered.
    • The previously agreed consideration for the supply of the goods or services is being altered by agreement with the recipient (including a discount).
    • Part of, or all the goods or services supplied are returned to the supplier (including any returnable container returned to the supplier).
    • The price on the tax invoice was either overstated or understated.

    This will, however, only be necessary if in respect of any of the above circumstances the supplier has either
    • issued a tax invoice and the tax charged is incorrect; or
    • furnished a VAT return in which the incorrect amount of output tax was accounted for.

    The debit or credit note must be issued, whether or not the supplier accounts for tax on an invoice or payments basis. The issue of a credit note is not required when a prompt payment (settlement) discount is the reason for the reduction in the consideration, provided the terms of that discount are clearly shown on the tax invoice.
    CHAPTER 15

    ADJUSTMENTS

    15.1 INTRODUCTION
    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.

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    I'm not getting this? Why on earth can't you do either a credit note or a credit journal for a bad debt scenario?
    Sometimes a credit note makes more practical sense, for instance, if it is used in your commission calculations in your accounting package and you don't want to pay commissions on bad debt sales.

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    My view exactly!

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    Quote Originally Posted by BusFact View Post
    I'm not getting this? Why on earth can't you do either a credit note or a credit journal for a bad debt scenario?
    Sometimes a credit note makes more practical sense, for instance, if it is used in your commission calculations in your accounting package and you don't want to pay commissions on bad debt sales.
    My understanding is that the VAT treatment of a supply is generally determined by what happened in law. Subsequently, this event is captured in the accounting records. It follows that there are many entries in accounting that have no VAT effect (e.g. depreciation, bad debts provisions, etc.).

    If a sale was made and the recipient refuses to pay, the supplier may take legal action against the recipient. However, if a credit note is issued, the supplier is effectively notifying the recipient that it no longer owes the debt.

    With regards to commission, this usually involves an agent, making a separate supply of services to the principal for a fee (usually called 'commission') and the agent is required to issue a tax invoice to the principal in this regard. I need to consider the agency agreement to determine the VAT consequences - in the unlikely event that the agent's supply is deemed to be cancelled if it made a supply of goods or services on behalf of the principal to a recipient that is not settling its debt, the agent will issue a credit note to the principal.

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    Quote Originally Posted by bammer View Post
    If a sale was made and the recipient refuses to pay, the supplier may take legal action against the recipient. However, if a credit note is issued, the supplier is effectively notifying the recipient that it no longer owes the debt.
    Fair point, although I suspect that with most small businesses, the debt is being written off because it is not recoverable, so whether the debtor owes it any more or not is a little irrelevant. I do however accept that there are situations where one might claim a bad debt VAT refund when its really a doubtful debt with a lengthy legal battle ahead - mainly a cash flow consideration I suspect.

    I also struggle to see how the law would interpret a credit note which explicitly states that the debt is bad or irrecoverable, as being a release of debt. But that is a lay view, not a legal opinion, and the law has done stranger things.

    In any event I still don't see what it has to do with SARS. The VAT effect is the same.

    Quote Originally Posted by bammer View Post
    With regards to commission, this usually involves an agent, making a separate supply of services to the principal for a fee (usually called 'commission') and the agent is required to issue a tax invoice to the principal in this regard. I need to consider the agency agreement to determine the VAT consequences - in the unlikely event that the agent's supply is deemed to be cancelled if it made a supply of goods or services on behalf of the principal to a recipient that is not settling its debt, the agent will issue a credit note to the principal.
    My situation is much simpler. Its my staff. The accounting package calculates their commission based on gross profit from invoices and credit notes. It cannot do so with journals. They are not entitled to comm on bad debts. Forcing me not to process credit notes, just creates extra manual work and increases chances of comm errors. Its quite nonsensical in my opinion.

    Keep in mind, this is all that this is, just an opinion. Your posts may be more factually correct.

  14. Thank given for this post:

    bammer (16-Sep-16), Madgek (15-Sep-16)

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