Common VAT Pitfall that Tax Audits Reveal – Part 1

The Ghana Revenue Authority uses tax audits to ensure compliance and to increase tax revenue. It carries out both comprehensive and desk audits.

The GRA’s approach is to focus its audit efforts on high-risk areas where the risk of noncompliance is high. VAT is one of the high-risk areas in their scope. 

In this article, we discuss some common VAT pitfalls that tax audits reveal, and challenges that cost taxpayers penalties and interest payments. 

Common issues that arise from VAT Tax Audits.

1. Failure to register for VAT

This issue is common to startups that have existed less than 3 years. They do not register for VAT because of ignorance of the law, improper record keeping or just to avoid the cost of compliance. 

A person who does not register for VAT is liable to a penalty of up to two times the amount of VAT payable from the time the person should have registered.  

To determine the VAT lost, the tax auditors will compute VAT on your taxable sales from the date you qualified to register to the date you registered.

This unexpected cash outflow can upset the plans of many businesses. For startups, who are often short of cash, this can cripple the business.  

2. Late filing of returns

Late filing of VAT returns is another common issue. You must file VAT returns and make payment by the 30th of the next month. Failure to file the VAT return on due date attracts a penalty of GHS 500 plus GHS 10 for each day that you do not submit the return.  

The VAT law assumes that the average revenue collection period of all businesses is 30 days. This assumption does not reflect the realities of many businesses and it poses a serious challenge to their cash flow. 

Some late filings of VAT returns happen because the taxpayer has not received payment on the invoices raised at the time the VAT declaration was due. 

To mitigate this, we recommend:

• Taxpayers should declare all sales and file their VAT returns whether they have received payments on them to avoid late filing penalties. 
• If you have not collected enough sales and don’t have enough working capital to prepay before collecting, pay what you’ve collected and make up later. See the paragraph of this article titled, “Paying tax in advance to GRA”, for our suggestion on how to deal with paying VAT in this situation.

3. Understatement of revenue 

The tax auditors verify the accuracy of revenue disclosed on the financial statement by comparing it to the total of revenues per the VAT returns. If the revenue per the financial statement exceeds the total of the revenue per the VAT returns, the auditors treat the difference as an understatement of revenue. 

Some common reasons for the understatement of revenue in the VAT returns are:

• Failure to declare zero-rated supplies on VAT returns. 

If you do not declare sales to non-residents on the VAT returns, this will cause a difference between revenue per financial statement and that calculated by the auditor.

Most taxpayers ignore these supplies and do not have the documents to prove that buyer used the services outside Ghana, so they end up paying unnecessary taxes and interest on the sales amount.

• Failure to declare exempt supplies on VAT returns. 

A failure to declare exempt supplies such as medical supplies, agricultural inputs, or recharges on the VAT return will cause differences between revenue on the financial statements and revenues derived from adding up the VAT return.

To avoid this problem, make sure you report exempt supplies on your VAT return. 

• Failure to replace original copies for cancelled invoices back in the VAT booklet. 

Where the volume of sales is small, the GRA auditors may validate revenue by adding up VAT invoices issued. The VAT booklet is one of the key documents used in confirming whether you have accounted for all sales during the year. When you cancel an invoice or issue a credit note to a customer, GRA expects you will retrieve the cancelled invoice and attach it to the duplicate in the invoice booklet. 

If you do not show the original copy of a cancelled invoice, the tax auditors assume you made a sale that counts as revenue. Note if GRA has not allowed you to use your own invoices instead of VAT invoices, the tax auditors will not accept your credit notes as evidence of cancelled VAT invoices.

As the burden of proof is on the taxpayer, it is important for taxpayers to retrieve the cancelled invoices from customers before issuing a credit note on them. If the customer cannot return the invoice, the taxpayer should get a letter from the customer confirming the cancelled invoices.

4. Disallowed Input VAT

Not all input VAT qualify for offset against output VAT. You cannot offset VAT on the following transactions against output VAT.