For many small business owners, the idea of registering for Value Added Tax (VAT) frightens them. According to the VAT Act (Chapter 23:12) all businesses which are not exempt from charging VAT are required to register and charge VAT on goods and services provided (under certain criteria) if their sales exceed either US$5,000 per month or US$60,000 per year whichever comes first.
For many small businesses this equates to increasing your prices so that you cater for the 15% VAT and still be able to maintain the same profitability as before. Generally speaking their fears are true. However, there are some benefits which come with being registered for VAT although they are far less than the financial prejudice that you suffer. Upon being registered for VAT, your business can now charge VAT to your customers and your can also claim or deduct VAT that you pay to your suppliers.
The tax you charge on your own sales of goods and services is known as Output VAT and it must be calculated on sales both to other businesses and to ordinary consumers. Output VAT must also be calculated when you withdraw goods or services for private use from a registered business. This is done by simply adding 15% to your base selling price.
If at the time of making the sale, the business did not charge VAT for one reason or another, but then the business becomes liable for VAT collection on those sales, then formula 15/115*Sales Value is used to determine the VAT that was supposed to be collected from those sales. The reason behind is that the sales value was the grossed up figure including the deemed VAT component and the base price. Thus the total sales value was already inclusive of the VAT thus we have to work backwards to determine the VAT value.
Input VAT is the value added tax added to the price when you purchase goods or services liable to VAT. The business can then deduct this input VAT when lodging the VAT return. This means that when posting each expense or purchased stock transaction, the VAT component is separated for the base cost and posted to the VAT Input account whilst the expense element is debited to the income statement or trading account in case of stock.
For those businesses whose sales of taxable goods and services exceed $240,000 per annum, the business is by law supposed to configure a fiscal memory device which will record all transaction through an electronic register for use by Zimbabwe Revenue Authority (ZIMRA) in the administration of VAT.
To register or not?
Generally speaking registering for VAT adds more administration work for the entrepreneur and cuts into the profit margin. I say so because in this competitive environment coupled with cash shortages and low disposable incomes, increasing your prices would be suicidal. The general retail trend has been price wars and price reductions since the dissolution of the government of national unity in 2013. So if you cannot add the 15% because this might (and probably will) kill your business, what options does an entrepreneur have once their business breaches VAT threshold?
One option would be to break up your business into two, to come up with two trading entities which have sales below the threshold. For example, say you are running a clothing boutique in Harare central business district (CBD) and your sales have just reached $60,000 mid year. You can literally split the shop into half and register a new company which will sub-lease from your “old” company. If say, you sell both male and female items of clothes, you could separate the men’s clothes from women’s clothes and put men’s clothes on the left side of the shop with a respective sales counter, branding and receipt book & books of accounting for that business. The “new” female clothing business will be incorporated, operate under a sub-lease, with its own branding, have its own sales desk, receipt book and books of accounting, be registered with ZIMRA as a new business and obtain a tax clearance for that company. Breaking up a business is one advantage of operating your business through a register company as explained in the blog – Should I incorporate or operate as a sole trader?
That way you can legally have two businesses operating autonomously and comply with ZIMRA laws but still be under the VAT threshold so as to maintain your competitive prices. If you need more information on this tax subject or assistance with putting in place such a structure please get in touch with Tanaka on landline 08677 130 017, cell 0732 469 712 or email firstname.lastname@example.org