By Mark Ruhindi
There has been confusion amongst the business community arising from the changes in VAT compliance ushered in by the recent public notice by URA requiring VAT withholding agents to begin withholding VAT effective 1st December 2021, with many confusing VAT withholding rules and the rules underpinning the concept of VAT in general or even confusing VAT withholding with withholding Tax under the Income Tax Act.
First off, the VAT threshold still stands at Ugx 150M. The threshold has not been reduced to Ugx 37.5M as has been misunderstood by a section of traders.
‘VAT withholding agents’ and ‘VAT taxable persons’ are two different concepts. A VAT taxable person is one on the VAT register or one who is required to be on the VAT register but who has not become registered.
Whether the law deems one a VAT taxable person falls contingent on the following events along the course of the business cycle;
1. A person who makes total taxable supplies exceeding Ugx 37.5M exclusive of any tax in a period of 3months is obligated to apply for VAT registration.
2. When in any one quarter a person has made total taxable supplies exceeding Ugx 37.5M exclusive of any tax, they’re required to register within 20 days.
3. When upon reasonable grounds a person anticipates to make total taxable supplies exceeding Ugx 37.5M exclusive of any tax in any one quarter, they’re expected to register at the beginning of that quarter.
4. When upon reasonable grounds a person anticipates to make total taxable supplies exceeding 150M exclusive of any tax in any tax period of more than 3 months, they’re expected to register at the beginning of that period.
So what’s the difference between a VAT withholding agent and a VAT taxable person;
The moment when in the course of a person’s trade activities, one of the above four contingencies happens, then the law deems that person a VAT taxable person, whether they register or not.
Under Section 5 of the Value Added Tax Act, the minister of finance has powers to designate persons who shall be under the obligation to withhold tax on a payment for a taxable supply and this person shall remit to URA 6% of the taxable value of the supply(6% of total amounts paid in consideration).
In exercise of powers granted under this provision, and by the Value Added Tax(designation of withholding agents) notice 2020, the minister has since designated a total of 1025 VAT taxable persons as VAT withholding agents.
It follows that not all VAT taxable persons are VAT withholding agents, but only those whom the minister has designated as such by this instrument.
The withholding agents shall withhold 6% of VAT from supplies made to them by their suppliers. This obligation shouldn’t be confused with the obligation upon them to charge 18% VAT on any taxable supplies they make to their customers. And this is the line traders who have been thrown into confusion by the changes need to draw.
The ultimate commercial consequence of the concept of VAT is that it is commercial neutral to the business and still remains so.
VAT withholding is also not to be confused with withholding tax under income tax. But just as withholding tax under income tax is deemed tax paid on behalf of the person from whom the tax is withheld, withheld VAT will be deemed VAT paid on behalf of the person from whom it is withheld.
Under the new law, persons making supplies with transaction values of Ugx 37.5M and above, regardless of whether or not they’re on the VAT register, will now be deemed to have paid to URA an advance VAT of 6% of the total VAT(18%) attaching to such supplies once a VAT withholding agent withholds and remits the same on their behalf. They’re expected to account for the remaining 12% in respect of the same supply in a return filed by themselves.
The most critical point to note for the business community is that the changes will not apply to tax payers who demonstrate and satisfy the Commissioner General that they have regularly complied with VAT obligations. For this category of tax payers, the VAT withholding rules will not apply and so when making a taxable supply, the payment they receive from a customer who is a VAT withholding agent will be the entire taxable value of the supply(the full price). For the rest, a withholding agent will be under the obligation to withhold VAT, failure in which they will face penal consequences.
The commercial implication of these changes are far reaching especially for the smaller businesses. The first challenge arises from the cash flow and revenue/working capital perspectives. VAT non compliant businesses which are already in distress may as a result of the changes continue to suffer perennial cash flow and working capital problems. The harshness of the new changes to such businesses arises from the fact that they are now expected to fully comply with VAT obligations. I.e, register and be allocated a VAT number and file returns if they’re to claim VAT refunds that they so badly need to plough back into the business. The sigh of relief for businesses however is that the EFRIS system makes the need for URA’s protracted refund request audits unnecessary and so there should be no reason to delay VAT refunds on the part of URA.
The alternative to compliance under the new changes is not to sell to any of the designated VAT withholding agents and therefore lose business, a worse fate.
The Second is the compliance costs which they must now take into account. VAT compliance is an all year round exercise and may require even smaller businesses to retain full time on the call tax advisors as opposed to engaging consultants only occasionally.
The writer is a tax lawyer and commercial advisor.