Withholding VAT

What is withholding VAT?

It's a method of collecting VAT where a portion of VAT collected is appointed withholding VAT agents from payments made to a local suppliers of VAT able goods.

Note: This therefore means that it is not a tax but a method to collect tax by the government

Currently the portion of 2% of 16% is withheld VAT. The VAT withholding agents remit the withheld VAT on behalf of the suppliers to KRA by the 20th day of the following month

VAT withholding agents

Institutions appointed as withholding VAT agents are:

• The government institutions
• Parastatals
• Banks
• Financial institutions
• Co-operative societies
• Insurance companies
• Regular exporters

How does it work?

-When a supplier or trader who is the taxpayer supplies and invoices an appointed withholding VATagent the payment for the supply is made less withheld VAT charged (2% of value of supplies ). The agent is to withhold the VAT irrespective of whether the supplies is registered for VAT or not.

-The agent the issues a certificate to the supplier to show the VAT is withheld.

-The certificate enables the supplier to claim back the withheld VAT to avoid double taxation since the same ta is declared and paid by the trader through a VAT.

What goods are charged with the withheld VAT?

Only taxable supplies can be charged with withheld VAT. No VAT is withheld on exempt goods, exempt services and zero rated supplies.

If there is any exempt goods charged with withheld VAT it is treated as an error on tax paid and therefore refundable by the commissioner.

Effects of withholding vat in business

Positive effects

Negative effects

1. Withholding VAT is found to increase compliance and decrease in the evasion of tax or underpayment of the tax. This is because people do not notice how much the pay in the withholding systemhence more cooperation. 2. It is amethod through which the government earns a steady income throughout the year. This is because there are fewer people who can evade paying the tax.

1. Loss of income. When money earned for your supplies is withheld, the government gets to earn that money instead which would have been invested in the business instead. Even though the amount withheld is not a huge amount, it decreases the revenue of the business. 2. In case of tax refund or over- withholding: this means that one permitted the government too much money out of ones paycheck. When you put too much money in your withholding you don’t get a refund till the next year April 15th. This money doesn’t earn any interest and therefore it is seen as a loss compared to one who invested his money in a bank and later earned interest. 3. In case of under-withholding: this is whenone is keeping their money for a longer periodof time. This may negatively affect a business if come April 15th one doesn’t have sufficient money to pay. It may lead one to paying penalties and interest on what you owe.

 

Mistakes on VAT admnistrations

According to a survey commissioned by intuit QuickBooks, business owners spend averagely one hour 20 minutes checking their figures before submitting their VAT returns.

By knowing the mistakes commonly made, one can then try to avoid those specifics mistakes

1. Entering the wrong figures.During entering the wrong figures on the VAT return form. This may lead to over withholding or under-withholding VAT. It is therefore important to crosscheck the figures
2. Not charging VAT on non-standard or goods outside of regular trading. This can include cash sale property income .they can be overlooked or not given the right attention therefore too little or too much VAT. It is therefore important to take note of every transaction occurring in a business.
3. Reclaiming VAT on deposits instead of waiting for the full balance to be received.so if a suppliertakes a deposit for certain goods and services, VAT is due when that initial payment is received.
4. Claiming on exempt and zero-rated goods. These goods are not to be added and charged with VAT or VAT withheld.
5. Reclaiming VAT with no invoices. The invoices are offered by the VAT agents to the suppliers. One must provide the evidence in the form of the VAT invoice so as to avoid (the supplier) double taxation. One must therefore get all the paperwork in order and chase all missing or late invoices before submitting tax returns.
6. Using the wrong VAT scheme. There are various schemes that can be adopted while recording and submitting VAT information.

 

a)	Standard VAT scheme	This scheme records income and expenses once an invoice has been issued irrespective of whether the payment has been made or not.
b)	Cash accounting VAT scheme	This scheme reports income and expenditure once payment has been made.
c)	Flat rate VAT scheme	This scheme allows the business to pay VAT at a fixed percentage of its annual turnover

 

7. Not repaying the VAT on supplierinvoices. When one does not pay back the balance on a supplier invoice for over 6 months, one will be required to reclaim and repay the VAT.
8. Reclaiming VAT on personal expenses. Nowadays, many people work from home .This as result may result to one using home equipment to do office work. Note that one can only reclaim VAT on the business portion of an expense. This will therefore require one to estimate the percentage used for business and submit that amount only.

Citations based on withholding VAT and more information included

1	https://www.kra.go.ke/images/publications/Withholding%20VAT%20Overview.pdf
2	https://kam.co.ke/withholding-tax-vagueness-raw-deal-industry/
3	https://www.tide.co/blog/business-tips/vat-mistakes/

 

 

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