The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Businesses with an annual turnover below $400,000 “may gain a small advantage” over larger rivals when it comes to their Value-Added Tax (VAT) burden, the Government has admitted, although there are some catches.

This, and other information released by the Ministry of Finance via its VAT ‘guidance notes’ for 12 different industries, truly proves that the ‘devil is in the detail’ when it comes to the Government’s tax reform centrepiece.

The notes detail how the ‘Flat Rate Scheme’, designed to reduce the bureaucratic and accounting burden on small and medium-sized Bahamian businesses, will reduce their tax burden via a lower VAT rate.

Such companies can apply to the VAT Comptroller to use a ‘flat rate’, which is less than the standard 7.5 per cent, and then calculate their tax liability by simply applying this to their net sales.

This method enables small and medium-sized businesses to avoid having to calculate their VAT ‘input’ payments for each filing period.

Using the example of a clothing retailer with a monthly income of $4,000, the Ministry of Finance’s guidance notes state that $3,070 would be collected in VAT from customers at a 7.5 per cent rate.

But, levying just a 4.5 per cent ‘Flat Rate’ to the $44,000, and allowing the retailer to forego tracking its VAT ‘input’ payments, the Government would receive just $1,980 even though #3,070 was collected in tax from customers.

“The scheme is purely designed to alleviate the administration burden on small businesses, not to provide a tax advantage, although some businesses may gain a small advantage whereas others will not,” the Ministry of Finance and its VAT Department conceded.

However, there are ‘catches’ to applying for, and being granted, a ‘Flat Rate’ which have not been disclosed before.

These include being locked into the ‘Flat Rate’ for a minimum two-year period, plus being unable to recover VAT ‘input’ payments made on a company’s supplies and purchases.

“Once you have adopted the Flat Rate Scheme, you must use the scheme for at least two years before you can apply to come out of the scheme,” the Ministry of Finance said.

“If you are on the Flat Rate Scheme, you cannot recover any VAT incurred on purchases as input tax.”

All this prompted Rick Lowe, Nassau Motor Company’s director/operations manager, to sum up the Government’s VAT proposal thus: “The devil’s in the detail.

“What about depreciation on equipment, and paying VAT to import it?” he asked, after reading the Ministry of Finance’s guidance notes on the importation of motor vehicles.

“It’s not a simple process. We’re getting together with our accountants and auditors to make sure we’ve covered our backsides. It’s not as simple as they [the Government] hold it out to be.”

For those companies that will not be able to recover 100 per cent of their VAT ‘input’ payments, the ‘guidance notes’ hold out the beguiling possibility of applying for “a special method” to deal with this if they believe the outcome “unfair”. And, what’s more, companies can select this ‘special method’ themselves.

This, though, seems likely to overwhelm the VAT Comptroller with bureaucracy, as numerous companies are likely to take advantage of this offer.

“Where costs relate to both taxable and exempt supplies, you need to apportion the VAT in relation to the value of the supplies made,” the Ministry of Finance guidance notes say.

“To determine how much VAT you can recover if you make both taxable and exempt supplies, you should use the standard method of apportionment outlined in the VAT Guide.

“If you do not consider this method gives you a fair and reasonable allocation of costs, you can apply to the Comptroller of VAT to use a special method.

“In your application you must detail the method you propose to use. You must not use a special method without written agreement from the Comptroller.”

When this was pointed out to him, Mr Lowe said: “I can’t see them making exceptions like that. It would be a nightmare for them. It’s just crazy.”

The Ministry of Finance notes also illustrated the extent to which fee-based financial services transactions in the domestic economy will be subject to VAT.

Among the VAT-able transactions will be Automatic Teller Machine (ATM) transactions by Bahamians; payroll payments; bank drafts, wire transfers and foreign currency exchange; safety deposit boxes; household bill payments; cash handling charges; credit card services; the initial fee for arranging mortgages and personal loans; overdraft facilities; and fixed rate charges to account holders.

In other words, Bahamians need to brace for a wide-ranging cost increase associated with all fee-based financial services transactions.

And home ownership costs associated with newly-constructed properties are also set to increase, because the Government’s plan to treat this sector as VAT ‘exempt’ means developers are unable to recover VAT ‘input’ payments made to sub-contractors and for building materials.

Franon Wilson, Arawak Homes president, said the company still believed the Government wanted the residential housing and construction industries to move forward.

But he agreed that the proposed VAT tax treatment would “absolutely” increase the cost of home ownership for Bahamians when it came to new-builds, cutting some persons out of the market altogether while forcing others to purchase smaller homes.