By NEIL HARTNELL
Tribune Business Editor
A Tax Coalition co-chair last night said the confusion over whether vendors would have to pay Value-Added Tax (VAT) on pre-existing contracts if clients refused was one reason why the private sector wanted to go back to ‘exclusive pricing’ for the tax.
Robert Myers’ comments came as the Ministry of Finance moved to clarify the issue, releasing a statement that confirmed the recipients of goods and services, and commercial real estate tenants, would have to pay VAT on pre-existing contracts post January 1 by law.
“Contracts that are already in force and continue into 2015 will not have to be rewritten, even though suppliers will have to account for VAT on such revenues. VAT will have to be assessed on the portion of supplies made on or after January 1, 2015,” the Ministry of Finance said.
Then, the critical part. “If the contracts do not already make provision for VAT, the law empowers suppliers to charge VAT through the enabling provision [in law]. Supplemental bills may also be issued if necessary,” it added.
The Ministry of Finance, in convoluted wording, appears to be saying what well-known realtor David Morley had told Tribune Business yesterday: That the VAT Act, as statute law, “supersedes” the provisions contained in pre-existing lease or any other goods or services supply contract.
In other words, and as the Ministry of Finance says, the law makes it clear that it is the end-user/end-consumer who pays the VAT, not the vendor/supplier.
Thus commercial landlords and suppliers will not be forced to ‘eat’ the 7.5 per cent levy in their rental payment or contract value, even if there is no provision in the agreement for the client to pay the tax.
“My basic understanding is that a new law coming into effect supersedes any contract law,” Mr Morley told Tribune Business. “You can’t have a contract that violates the law of the land.
“How would VAT coming into effect impact existing contracts? It’s the law of the land, and commercial tenants will be charged it and have to pay it. It’s a statute law, and my understanding is that it takes precedence over any pre-existing contract.”
Confusion had been by the VAT ‘transitional guidance notes’, which seemingly made it clear that the vendor will have to pay the VAT from sums due to them if the client refuses to pay the tax - and there is no contractual provision to force them to pay.
The guidance notes said: “Some contracts entered into prior to January 1, 2015, may not provide for the application of VAT to the price of the services.
“If the contract for services does not provide for the application of VAT to the price, and your customer does not subsequently agree to you charging VAT on the contract price......... the price charged for the portion completed on or after January 1, 2015 is deemed to include VAT.”
The notes for the real estate and the commercial rental market said similar, adding: “If the rental contract does not provide for the application of VAT, and it cannot be agreed with the tenant that VAT is charged in addition to the rent under the terms of the contract, the rent payments are deemed to be inclusive of VAT.”
The Ministry of Finance and Mr Morley effectively refuted such interpretations yesterday, with the Morley Realty principal adding that the lease agreements employed for properties his firm managed included a “general provision to mitigate landlord risk”.
This, he explained, required commercial tenants “to uphold any current or future laws that may affect the real estate”.
While “vaguely worded”, Mr Morley said this would catch VAT and “the ability of the landlord to charge it and the tenant to pay it”.
And, once it was clear the Government was looking to introduce VAT, Mr Morley said all rental/lease agreements handled by his company had been modified to allow for the possibility tenants will have to pay the 7.5 per cent levy on top of their rent.
Mr Myers, though, said the ‘pre-existing contract’ issue highlighted why the Coalition for Responsible Taxation wanted the Government to go back to VAT ‘exclusive’ rather than ‘inclusive’ pricing.
The former would break-out the amount of VAT paid from a product/service’s price, while the latter would show the tax as part of a single, total price.
The ‘exclusive’ approach, Mr Myers added, would foster greater transparency and accountability on the part of both the Government and businesses, forcing price (cost) and tax to be broken down into line items.
Backing the position outlined by the Government last night, Mr Myers said: “That’s why we unanimously don’t want VAT inclusive pricing. It needs to be line itemed
“The liability of VAT paid on pre-existing rental agreements, we unanimously agree that the Government has to stand behind the landlord and recognise the tax by law attaches to the recipient of the good and service, not the vendor.
“It is absolutely the recipient’s responsibility to pay the tax. It is the vendor’s responsibility as the unwilling collector to collect government’s taxes. It’s not our money, it’s their money.”