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The Value Added Tax (Amendment) (No. ) Bill, 2019 was recently passed in the House of Assembly and Senate in June and July 2019 respectively and declares in Section 2.60D:
“Where an amount payable to the Revenue Commissioner as tax or as a penalty or interest in respect of arrears of tax for the years 1996 to 2000 is outstanding, the amount is written off.”
There are a few things that require clarification for us to understand the full ramifications of this inclusion.
A write off in accounting terms is defined as a reduction in the recorded amount of an asset, the asset in this case being the VAT owed to Government. This is usually done when it becomes doubtful whether the amount owed is still collectable and there are several factors that can trigger this, including the length of time the amount has been outstanding, as well as specific factors, such as the financial demise of the entity that owes these funds.
Given the period outlined in the bill, amounts owed since 1996 represent receivables that have been outstanding for approximately 20 years. Therefore, it is prudent to create a provision for these amounts, as it is unlikely they will be repaid.
However, some investigation is required to ensure that there is follow up on these outstanding amounts by reviewing the register of defaulters, as some of these companies may still be financially viable and can repay their outstanding VAT. There are many reasons why this effort is critical:
- The first, and perhaps obvious reason, is that the Government is currently still in financial difficulty. Although our foreign reserves have been stabilised, these funds have to be used to grow the economy so that we can repay our debts. We can ill afford to mismanage any funds by forgiving debts for companies that can well afford to pay.
- Forgiving debt for companies that could afford to pay sends the wrong message that it is acceptable to default on your obligations to Government. The message sent is that if you wait long enough your debt will be forgiven, and you will escape your financial obligation. Not only does this reward the defaulter, it unfairly punishes those companies that have been faithfully submitting their VAT and robs the tax payer that has paid this VAT to the company, expecting that it would be remitted to the Government to help build this country.
- When a company defaults on its tax obligations, the Government’s need for that cash does not disappear. Government is then forced to find alternative means of earning these funds, sometimes by raising taxes on the country. This is a double blow for those who have been dutiful, as they are now expected to pay their share, as well as to foot the expense for those who have been delinquent.
- VAT is a sales tax. This means that a company should have calculated the cost of doing business and accounted for this to ensure that they earn the profit required to keep the business going. Therefore, a profitable company that holds on to VAT has unfairly gained additional profits at the expense of the taxpayer and country.
To minimise the impact of these identified write offs, Government should be urged to follow through on its promise to hire debt collectors to go after those defaulters that have the financial means to pay their outstanding debts. Those that remain in business but are experiencing financial difficulties should come forward so that a payment plan can be arranged.
Permanent write-offs should only be granted to those companies that are no longer financially viable or no longer exists.
*Krystle Howell, CPA, CIA, COSO, ALMI, ACS, aka Mavis, is an Internal Auditor by profession, avid artist and a lover of dance.