CHAPTER 15 VALUE ADDED TAX III

After studying this chapter you should be able to apply the following Special Retailer Methods: Method A Method B Method C

15.1 SPECIAL RETAILER METHODS Generally a taxable supplier is required by law to record each separate supply of goods and services in the period in which the Tax point falls or at the time of supply. But a retail shop cannot always keep separate record of each supply as it is made, although with VAT it may be making standard rated, zero-rated and exempt supplies. Three methods of calculating output tax on standard rated supplies have been designed which greatly simplify VAT accounting for retailers (Method A, B, and C). The three methods are described in this chapter with the aim of providing a useful insight on the prerequisites of applying any of the methods by retailers. Method A requires the retailer to separate sales into the exact amounts sold in each category (i.e. standard rated, zero-rated, or exempt). Method B requires Sales to be apportioned in the same proportion of the standard rated and zero-rated/ exempt purchases. Method C allows a retailer to calculate the estimated sales of zero-rated/ exempt items by the uncomplicated method of listing all such purchases and adding a flat 10% mark-up onto them. The balance of sales is deemed to be the total daily gross takings less the estimated zero-rated/ exempt sales obtained by this method. If for any reasons a Retailer cannot use any Retail Method then he must use the normal way of accounting for output tax, that is, Invoice basis and record each separate supply as it is made.

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Qualifying Retailers Only retailers who sell directly to consumers may use a Retailer Method and only for those supplies made directly to the consumers. This means that: Wholesale supplies and supplies to associated businesses made by a Retailer who uses a Retailer Method should be accounted for outside the Retailer Method; Supplies of professional services such as accountants and lawyers who normally bill their customers are not eligible to use a Retailer Method; Supplies from restaurants, canteens, cafeterias and other similar businesses are not eligible to use a Retailer Method; and Manufacturing Retailers e.g. bakers, shoe manufacturers etc who sell directly to consumers or suppliers of services who sell directly to the public are only eligible to use Retailer Method A. Retailer Method C is only available for a retailer who has a retail sales turnover not exceeding K200m per year, and only covers retail sales where tax is accounted for using daily gross takings (i.e. it does not apply to invoiced sales where tax is calculated from a listing of their totals).

Does the Retailer Method affect the Tax period? No. Where a Retailer has decided to use a Retailer Method he will still have to use the tax period allocated to his business, and he will be required to submit his VAT Return within 21 days after the end of that tax period. Accountable Records A Retailer Method will not relieve a taxpayer of the responsibility to maintain Tax records. He will be required to keep records and accounts to include: A separate record of daily gross takings; Till rolls; and A record of till readings (e.g. X and Y readings for tills A and B for each day). The Zambia Revenue Authority may require the Taxpayer to maintain other additional records and accounts if they find it necessary. MULTIPLE BUSINESSES Where a Taxpayer has used the Retailer Method but is engaged in other businesses he need not apply the retailer method exclusively. Other than for those particular Supplies, which are eligible for a Retailer Method, he is required by the ZRA to account for the rest of the Supplies outside the Retailer Method (using either Invoice Basis or Payment Basis), he can use: A Retailer Method for all his supplies if all of them are eligible;

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 A Retailer Method for his supplies which are eligible and the normal way of VAT accounting for the rest; or A combination of Retailer Method A, Retailer Method B and Retailer Method C if his supplies are eligible. DAILY GROSS TAKINGS What Are Daily Gross Takings? Rather than record separately each supply as it is made, a Taxpayer keeps a record of his sales on daily basis. Gross takings means that all payments that are received for goods supplied must be included on the day the payments are received, and this includes payments made for supplies before starting to use a Retailer Method or before registration. Failure to include all payments will result in an underpayment of tax and will result in the Tax Payer incurring penalties and interest, in addition to the tax arrears. Particular care must be taken to add back into the days takings any money taken out, for example, from the till to pay for cash expenses. Some Basic Rules If the Tax payers record of daily gross takings is wrong, his calculation of Output tax will be wrong; so he must: Add to the gross-takings any monies removed from the daily gross takings as owner's drawings or for making payments for purchases; Add to the daily takings the normal selling price of the goods he has taken from stock for personal use or the use of others; Add to the gross takings the normal selling price of goods he has supplied but for which payment is not made in money, e.g. goods taken in part exchange; Deduct from the gross takings payments that are not being accounted for by a Retailer Method e.g. wholesale supplies; and Deduct from the gross takings any refunds made to customers when goods are returned. SPECIAL CASES a) Payment by Cheque or Credit Card The Tax Payer should include in the gross takings payments made in these ways as if he were receiving cash for the full amount payable. That is to say that there should be no distinction between Cash and credit Card / Cheque payments.

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b)

Deposits

A deposit is usually an advance payment and should be included in the Tax Payers gross takings on the day he receives it. c) Sales on Credit Terms If the Taxpayer has given credit to his customers, thus giving them time to pay, but makes no additional charge for the credit, he may include all payments in the gross takings as he receives the payment. If he charges an additional amount for the credit, that additional charge is exempt and should be treated as an exempt sale in his Retail Method A calculations. D) Exports Any exports that a Tax Payer makes are Zero-Rated if they are accounted for outside the Retailer Method using the normal way of accounting for VAT and subject to the normal requirements for exports. e) Disposal Of Business Assets If a Tax Payer sells any of his business assets, for instance a Motor Vehicle, he should account for it outside the Retailer Method, and pay VAT to the Zambia Revenue Authority using the normal way of accounting for VAT.

CALCULATING TAX FROM GROSS TAKINGS Separating the Tax in Gross Takings Whichever Retailer Method a Tax Payer uses it will divide his gross takings for each month into standard rated and zero-rated /exempt gross takings. But retail prices of taxable goods or services include the tax and we need a way of separating the tax from the rest of the taxable gross takings. We do this by multiplying taxable gross takings by what is called the VAT fraction. Computing the VAT Fraction The VAT fraction depends on the rate of tax, but whatever the rate the fraction is quite simple. It is computed as follows: The Rate of VAT / Rate of VAT + 100 17.5 17.5 + 100 = 17.5 117.5 = 7 47

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Example: Maluba Mulevu Maluba Mulevu has used the Retailer Method to arrive at her standard rated gross takings which amounts to K6,000,000 Multiply the VAT fraction to standard rated gross takings figure for the tax period to find the output tax, if for instance the figure is K6,000,000

Answer: K6,000,000. X 7/47 = K893, 617= Output Tax for the Tax Period.

If there is another change in the tax rate you should recalculate your VAT fraction and use the new VAT fraction from the date of the change.

15.2 RETAILER METHOD A At the time of sale the Tax Payer must be able to allocate his takings between standard rated and zero rated /exempt supplies. He must be able to do this accurately which means that his partners or employees receiving payments, usually at the till or cash register, must know which goods are standard rated and which are zero-rated /exempt. Separate tills, or multi-total tills, are a good way of separating the Tax Payers takings as required. Another way is to use different color price labels so that the members of staff operating the tills can identify which supplies are standard rated and which are zero-rated /exempt. Having separated his takings of taxable supplies from gross takings for the tax period of the VAT Return the Tax Payer should: Multiply his total taxable supplies for the tax period by the VAT fraction Then add on the tax due on any supplies gross takings on which he is calculating tax outside the Retailer Method; The total figure should be entered in Box 1 of the VAT Return (VAT 100).

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Example: Step 1: Add up the Tax Payers daily gross takings from standard rated sales for the tax period - K6, 500,000.; Step 2: Multiply these standard rated gross takings (step 1) by the VAT fraction K6, 500,000. X 7/47 = K968, 085.11. This is the Tax Payers out put Tax. Step 3: Add the output tax charged during the month using invoice and payments basis; and Step 4: Add the figures in Step {2} and {3} and insert it in Box 1 of the VAT Return (Form VAT 100). -

15.3 RETAILER METHOD B This method divides the Tax Payers gross takings for each tax period between standard rated and zero-rated /exempt supplies in the same proportion as between the value of the Tax Payers taxable and exempt purchases for resale in the same tax period: there is an adjustment after twelve months, when the Tax Payer uses the same way of dividing gross takings for the tax year ending 30 June each year (this means that if his effective date of registration is other than 1 July, his first adjustment will come after less than twelve months). The Tax Payer is also required to make the adjustment if he ceases to be registered or stops using Retailer Method B.

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Example: Step 1: Add up all the daily gross takings for the month K20,000,000 Step 2: Add up the cost to the Tax Payer, including VAT of all standard Rated goods received for resale in the month K5,000,000. Step 3: Add up the cost to the Taxpayer, including VAT of all goods (Standard rated and zero-rated /exempt) you received for resale in the month K9,000,000. Step 4: Apportion the month's gross takings as follows using the figures above: K5,000,000.00 (step 2) x K20,000,000.00 =K11,111,111.11 K9,000,000.00 (step 3) Step 5: Multiply the taxable gross takings (Step 4) by the VAT fraction as follows: Output tax =K11,111,111.11 X 7/47 Step 6: Add the output tax on supplies that the Tax Payer accounts for Outside the Retailer Method and the Output tax in Step 5 above. The Total figure is then inserted in Box 1of the VAT Return (VAT 100). = K1,654,846.34

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ANNUAL ADJUSTMENT FOR RETAILER METHOD B The twelve months adjustment is done following the same steps above. Example: Step 1: Add up the daily gross takings for the last twelve months K90,000,000. Step 2: Add up the cost to the Taxpayer, including VAT, of all the taxable goods he received for resale in the last twelve months K30,000,000. Step 3: Add up the cost, including VAT, of all goods: (Standard rated and zero-rated /exempt) you received for resale in the months K60,000,000. Step 4: Apportion gross takings for the last twelve months as follows (Using the figures above) K30,000,000. (Step 2) x K90,000,000. (Step 1) / 60,000,000 (step 3) =K45,000,000. Step 5: Multiply the taxable gross takings (Step 4) by the VAT fraction K45,000,000.00 x7/47 =K6,702,127.70= Output tax for the 12 months. Step 6 : Add up the tax calculated from the Retailer Method on each of the twelve months and compare it with the total figure for the twelve months, and adjust the difference in the VAT Account. last twelve

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15.4 - RETAILER METHOD C This method enables a business to calculate the standard rated sales by listing the zero-rated and exempt purchases for resale and adding a flat mark-up onto them. Example: Step 1 - Prepare schedules of zero-rated and exempt purchases for resale during the tax period (separate totaled columns for each are usually advised by the ZRA); Step 2 -Sum the zero-rated and exempt schedules in Step 1 and add the totals: e.g. Total zero-rated purchases=K3,000,000; Total exempt purchases =K1, 500,000 Total zero-rated and exempt purchases =K3,000,000 + K1,500,000 = K4,500,000. Step 3 -Add 10% mark-up to the total figure obtained in Step 2 to arrive at the estimated total sales at the zero-rate or which are VAT exempt; = 110 X 4,500,000 100 =K4,950,000 Step 4-Total the gross takings from cash sales in the Tax period (Remember to add back to the daily gross takings any cash purchases, expenses, wages, drawings etc) e.g. = K10,950,000 paid out for cash

Step 5 - Calculate the standard rated sales in the Tax period by subtracting the figure arrived at in Step (3) the zero-rated/ exempt sales) from the figure arrived at in Step (4) - the daily gross takings in the tax period = K10,950,000 - 4,950,000 = K6,000,000 Step 6 - Calculate the output tax on retail sales by applying the VAT fraction to the standard rated sales calculated in Step 5. With a 17. 5% VAT rate this means that the figure from Step 5 is multiplied by 7/47 to obtain the output tax amount K6,000,000 x 7/47 = K893,617. 00 N.B The 10% mark-up in Step 3 cannot be varied as this fixed mark-up percentage is a prerequisite of using a Retailer Method C.

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DEALING WITH VARIATIONS Variation in the rate of tax at the beginning of the month: It is possible that the Minister of Finance, through a statutory order, may vary the Rate of Tax that was obtaining at the beginning of the year during the charge year. In the event that this takes place, the Tax Payer is required to operate his Retailer Method as was done in the past, but use the new VAT fraction for the period which starts with the date of the change. Variation in the rate of tax during the month: In this scenario the Tax Payer must divide the period into two parts - one part ending the day before the change and the other starting with the date of the change. Then he must apply the old VAT fraction to his taxable gross takings for the first period, and the new fraction to the later part. The tax calculated in the two part periods should then be added together to provide the total output tax from the Retailer Method in the month. Variation in the liability to Tax of Goods or Services Where there has been some variation in the Liability to Tax of the Goods or services, for instance where certain goods or services have become exempt in the course of the charge year, the Tax Payer is required to operate his Retailer Method in the usual way, but from the date of the change, the record of daily gross takings for taxable supplies must include takings from supplies which have become taxable, and exclude takings from supplies which have become exempt. Where Registration has ceased In Chapter 13 we highlighted the various ways in which registration might cease. In the event of any of the factors that might lead to deregistration taking place, the Tax Payer must operate his Retailer Method up until the day he ceases to be registered. Ceasing to use the Retailer Method In the event that the Tax Payer Ceases to use the retailer method he must follow the same procedure as if he were being deregistered for VAT, except that he will not have to pay tax on his business assets.

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