Migration to the Standard Rate Scheme; Addressing the Elephant in the Room
Ghana effectively implemented a new VAT law, the Value Added Tax Act, 2013 (Act 870) in 2014. This law introduced a number of changes to the existing VAT regime. The new VAT law, however, did not provide for the VAT Flat Rate Scheme (VFRS).
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To provide context, the VFRS was a scheme under the old VAT law where taxpayers with turnover ranging between GHS10,000 and GHS90,000 per annum, charged 3% VAT on their supplies without the opportunity to claim the VAT incurred on their costs.
For a short while, many taxpayers found themselves scratching their heads in confusion since the new VAT Act made no mention of the VFRS; were they to continue to charge VAT at 3% or was the scheme effectively cancelled?
The Ghana Revenue Authority (GRA) however issued a directive shortly after the passage of the Act which ended that state of limbo. The directive was simple: VFRS operators should continue to charge VAT at a flat rate of 3% on their supplies. A number of questions however still plagued the minds of taxpayers, notable amongst them were:
• How long would the scheme be in operation?
• How did the scheme fit under the new VAT Act?
• For new businesses with turnover below the revised threshold but above the VFRS turnover threshold, did they voluntarily register or not?
In the taxpayer’s view, the VFRS became the proverbial elephant in the GRA’s room waiting for attention and further clarification.
Recently, the issue has been addressed. A notice has been issued on the abolition of the scheme, giving directions on the movement of taxpayers from the VFRS to the Standard Rate Scheme, or alternatively, to deregister.
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Notably, the directive recognises that taxpayers who are deregistered have the option of voluntarily registering on the Standard Rate Scheme in line with the new VAT Act.
From our understanding of the directive, taxpayers on the VFRS who meet the turnover thresholds specified in the new VAT Act (i.e. turnover of GHS120,000 in a 12 month period) will be moved to the Standard Rate Scheme from the point at which the revenue threshold was met.
Taxpayers who made for example, GHS10,000 in revenue for the period January to March, but reached GHS40,000 revenue in the month of April, would be moved to the Standard Rate Scheme.
Where taxpayers do not meet these criteria however, an assessment will be made on their turnover and an audit performed. Once it has been firmly established that the taxpayer does not meet the migration criteria, they will effectively be deregistered.
The abolition of and the movement of taxpayers from VFRS to the Standard Rate Scheme, if applicable, has a number of implications for taxpayers.
In the first place, it means all new VAT registrations going forward – except of certain persons in the real estate sector - will be under the Standard Rate Scheme. Real estate developers who construct and sell buildings will have to charge VAT at a flat rate of 5% with no opportunity to make input VAT claims.
For existing VFRS operators, the migration could come as a relief to some and an administrative nightmare for others. As previously mentioned, VFRS operators could not make input VAT claims.
Now, they should be able to claim some of their input VAT and that requires knowing the conditions under which claims can be made. This will ensure that they are tax efficient while not violating the VAT laws.
For entities whose costs are higher than their output, the movement to the Standard Rate Scheme could result in the accumulation of large tax credits on their VAT returns and accounts.
Such entities will not be able to get a deduction for the deductible input VAT incurred as an expense by way of corporate income tax computations. However, the amount can be carried forward as a credit and utilised against future VAT liability.
Another implication for entities moving from the VFRS to the Standard Rate Scheme is the likely increase in administrative costs.
For entities previously on the VFRS who did not claim input VAT, the GRA was unlikely to focus on expenses during VAT audits. From this point on, the GRA is likely to focus on input VAT as well and therefore the requirement to fully keep records for a minimum of six (6) years will be strictly enforced during VAT audits.
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The requirement to audit input VAT will also lead to an increase in the audits costs of the GRA.
It is not all bad though; the abolition of the VFRS and the movement of some taxpayers to the Standard Rate Scheme has its merits. For instance, removing the VFRS evens out the playground to some extent.
With almost everyone on the Standard Rate Scheme, some form of consistency has been brought to the VAT environment save on the sale of qualifying real estate.
Want to know more? Let’s talk.
You can contact me by sending an email to george.kwatia@gh.pwc.com and copy in Abeku Gyan-Quansah (abeku.gyan-quansah@gh.pwc.com).
Business School - September 2015 session (Breakfast forum):
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Topic(s): Expatriate Mobility – playing a vital role in national development
Venue: Movenpick Ambassador Hotel, Accra
Date(s): 8 September 2015
Enquiry and registration: Please contact Brenda Asare on 0302 761500 (ext. 111) or via email to pwcgh.businessschool@gh.pwc.com