VAT disallowed on liquidated debtor

[bammer]

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.

As mentioned above "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." (my emphasis)

Since the amount of consideration agreed upon between the supplier and the recipient did not change (i.e. the recipient is still liable to settle the debt whether written-off or provided for), a credit note cannot be issued in terms of section 21 of the VAT Act, whether or not it explicitly states that the debt is bad or irrecoverable. It follows that where a vendor issues a credit note (for VAT purposes) for this reason, it will be invalid and SARS will likely assess the vendor, to the extent that it claimed input tax deductions which cannot be supported by valid credit notes as is required in terms of sections 16(3), read with 16(2) and 21 of the VAT Act (amongst others).

SARS may also argue (in terms of section 234 of the Tax Administration Act) that an erroneous, incomplete or false document has been issued by the vendor and if so issued willfully and without just cause, the vendor is guilty of an offence and upon conviction, is liable to pay a fine or be imprisoned for a period not exceeding two years.

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

It may seem like the VAT effects are similar but the essential difference for the purposes of this discussion, is that when a supplying vendor issues a valid credit note in terms of section 21, to a recipient, the recipient is required to adjust the amount of input tax it previously claimed (or was entitled to claim) by increasing its output tax for the period in which the credit note was received. In other words, the supplying vendor has to generate and deliver (whether electronic or otherwise) the credit note (i.e. document containing the particulars mentioned in section 21(3) of the VAT Act), to the recipient - which will likely not be the case in respect of a debt that has gone bad.

However, where a recipient incurred VAT on a supply of goods or services and claimed same as input tax and subsequently, the recipient does not settle the full amount that is due to the supplier within a period of 12 months (e.g. a typical bad debt scenario), the recipient is required (in terms of section 22(3) of the VAT Act) to make an adjustment (usually by passing a journal) which has the effect of reducing the amount of input tax previously claimed to the extent that it made payment in respect of the said goods or services.

It may be worthwhile to also consider the impact from an income tax and accounting point of view, i.e. what is difference for income tax and accounting purposes between a debt that is written-off (and/or provided for) as opposed to crediting the debtor (to effectively reduce sales/increase cost of sales).

Forcing me not to process credit notes, just creates extra manual work and increases chances of comm errors. Its quite nonsensical in my opinion.

It is hard to imagine that generating and delivering/posting/emailing credit notes to recipients (albeit incorrectly) takes less effort than passing a journal. Perhaps you should contact your accounting service provider; who knows, it may have an easy solution.

[BusFact]

Thanks bammer. I'm now starting to see the reasoning behind it. As a lay person I still find it pedantic and unnecessary, but that is merely an opinion. For all those readers following this post, listen to bammer, I'm merely venting frustration.

It is hard to imagine that generating and delivering/posting/emailing credit notes to recipients (albeit incorrectly) takes less effort than passing a journal. Perhaps you should contact your accounting service provider; who knows, it may have an easy solution.

The processing effort is the same, but processing a journal has no affect on the commission report generated by pastel in my case. Therefore once I have done the journal I then need to additionally:

1. Remember to follow this extra process.
2. Find the costings for each item originally invoiced.
3. Manually calculate the gross profit or rather loss for the journal. (would not be fair to reduce comm for the whole invoice amount).
4. Verify the rep's sales comm % level for the month and check if the adjustment is not going to drop him into a lower % rate.
5. Calculate the comm that needs to be credited, after searching for the dusty old calculator.
6. Print out the comm report and scratch out the total and then write in my adjustments calculated above so that it can be explained to the rep.

The credit note alternative is far less a PITA. All this because some SARS suit decided one day that he had a specific definition in mind.

Sorry bammer this is not directed at you, but at bureaucracy. Thanks for taking the time to clarify the matter.