Small business advocate: ‘VAT exempt’ is best
Guardian Business Editor
Published: Oct 28, 2013
A small business advocate has refuted suggestions from a senior KPMG partner that VAT exempt status is the “worst situation” for a company to be in, charging that the voluntary VAT registration suggested as an alternative would be burdensome and counterproductive for both small businesses and the government.
Addressing over 150 business people on VAT and its implications, KPMG Barbados tax specialist Wayne Lovell said last week that businesses must not “confuse” VAT exempt, and “zero-rated”, noting that while one means you pay VAT on inputs but do not collect VAT, the other means you can charge VAT at a rate of zero and claim credits for VAT paid on your inputs.
“Do not confuse zero-rated with exempt. If you are exempt, that is bad. If you are zero-rated, that is good. Do not assume exempt means zero-rated or zero-rated means exempt. Zero-rated is a taxable supply. It’s taxed at the nice number of zero percent.”
“Exempt supply is a supply not subject to VAT. Suppliers of exempt supplies do not charge VAT to their customers; so when you make a sale, there’s no VAT added to that sale.
“However, they are unable to recover VAT they’ve paid on their inputs. You pay for goods, services and utilities, some of these will be subject to VAT. If you are exempt, that VAT becomes a cost to your business,” said Lovell, referring to the fact that VAT registrants can claim “VAT credits” by netting VAT collected against VAT paid and remitting the difference to government, while VAT exempt businesses cannot.
His comments have spurred concern among organizations that might be labelled VAT exempt, which includes both small businesses and non-profit organizations, that they would take on additional costs under the new VAT regime.
Lovell suggested that businesses might have the opportunity to avoid this negative outcome by voluntarily registering to be a VAT registrant, despite falling under the threshold that is set by the government.
In response, John Rolle, financial secretary at the Ministry of Finance, noted at the start of his presentation to the group that the government has determined that it will allow companies to voluntarily register to become VAT registrants if they feel it would benefit themselves to do so.
To date, it has been suggested that the government is likely to set a threshold of $100,000 in revenue for determining who will be a VAT registrant, indicating that if your turnover is below this figure you would not need to – as a small business – implement systems to collect and remit VAT to the government from consumers.
The government has suggested that having such a threshold is a benefit both to small businesses, and to the government, who can avoid the cost of ensuring small businesses, which would provide minimal revenue even if registered, are compliant.
Minister of State for Finance Michael Halkitis did indicate in an interview with Guardian Business earlier this month, however, that this threshold is one of the remaining issues to be finally resolved before the release of the long-awaited VAT legislation.
Mark Turnquest, small business consultant, said the government must keep the threshold at $100,000 and argued that the ability for those below this revenue threshold to be VAT exempt will be beneficial.
“They should not even think otherwise (regarding the $100,000 threshold). There would be an increase in government expenditure to make small businesses compliant, and on the other side small businesses cannot afford an additional X amount to put in software and hire another person or give another person responsibility with pay to watch over VAT issues. It’s a no brainer to keep it at $100,000.”
“It’s not the worst situation,” said Turnquest of “VAT exempt” status for small businesses.
“I don’t know what he is talking about. If you are not making $100,000 in sales, the consequences of paying VAT would not be the burden of the business owner. They won’t be paying the penalty for VAT. Government will not be knocking on their door... it isn’t worth the while of government to make them compliant, and the small businesses cannot afford the accounting to deal with VAT. Unemployment is 16 percent so imagine if you tax them you’ll have unemployment in the 20s,” said Turnquest.
Meanwhile, Turnquest called on the government to help small businesses grow – the best way to expand the tax base, their revenue and the economy, he suggested.
“What [Lovell] should say is that the government should provide incentives to develop the small business community to try to get these small businesses to grow so they could make over $100,000 so they could pay value-added tax. It is in the best interest of government to finalize the SMEDA as soon as possible and to provide national and international funding and business support mechanisms to make all the small businesses big businesses over a period of time.”