As our economy continues to spiral downwards, debtors have become part of every small business be it trading or services. Besides being a significant part of business, debtor management has become one of the determining factors for success in business. Today’s business environment is characterised by ever increasing debtor payment periods with a good chunk going into bad debtors leaving the entrepreneur with only the legal route to recover the debt. As every entrepreneur knows, cash is the bloodline of the business and if a business runs out of cash, the business simple goes bankrupt and discontinues. This has led to many small businesses adopting the cash only business model to remove debtors all-together from their business but the truth is debt and credit are what enables small businesses to grow, leaving many businesses in a dilemma. In this article I explore ways to manage Zimbabwe Revenue Authority (ZIMRA) on the issue of paying taxes on revenue not yet collected.
Healthcare practitioners (Doctors) vs. ZIMRA
The fight between Doctors and ZIMRA has been going on for some time. The genesis can be traced to the milking of the medical aid company, PSMAS by its then Managing Director (MD) Cuthbert “Cashbert” Dube. PSMAS at that time gave its senior management unheard of perks with the MD earning as much as $500,000 per month. This resulted in premiums being gobbled up by administration expenses and claims not being paid on time and in some cases not paid at all. Even up to the time of writing this blog, there are still Doctors who have not yet been paid for claims they submitted in 2012.
In the end, Doctors provided the service to members of PSMAS, lodged the claims with the company, but the company did not have the money to pay claims. The company simply acknowledged the debt and made promised to pay in future. However, according to Income Tax Act Chapter 23:06 (Sections 10 and 18) taxes accrue on income earned whether the money has been collected or not. This meant that Doctors were liable for taxes on billed but unpaid work with PSMAS. Doctors however, resisted paying taxes on these debts and this led to ZIMRA conducting audits on Doctors from 2014 to 15. ZIMRA went to all medical aid companies and obtained statements for all Doctors and compared this information with income tax returns and sent Doctors letters asking them to reconcile the two. This period saw a lot of work for consultants engaged by Doctors to assist in resolving the impasse.
The same explanation is given for VAT accruing on credit sales, meaning entrepreneurs have to pay VAT to ZIMRA on all sales; cash and credit.
Cash flow mismatch resulting from ZIMRA interpretation
The two scenarios above lead to a cash flow mismatch which can threaten small businesses’ going concern. By ZIMRA demanding taxes on revenues which a business has not yet received the cash on means a business would have to fund that cash-flow mismatch with funds from somewhere else. This can only be either from retained earnings, loans or new equity. For many SMEs however, equity is usually a non starter and retained earnings are few to non-existent leaving many entrepreneurs having to borrow money to pay ZIMRA. Our current illiquid market simply means credit is expensive, with commercial bank interest rates of 30% per annum and micro-lending rates of 10% per month.
To pay or not to?
For most entrepreneurs, this is illogical! How can I borrow money to pay taxes which the economic benefit has not been enjoyed by my business? In as much as it borderline tax evasion not to declare and pay taxes on credit income, most businesses are running illicit parallel sales registers and only reporting cash sales and reporting credit sales as and when the cash is paid. Innovative businesses that are in the service industry have devised strategies to dissect a job into separate independent jobs; thus they charge per job and they require cash upfront for each job to enable them to pay Value Added Tax (VAT) on time. On the other hand those that sell goods and products have to apply to the ZIMRA Commissioner for a change in accounting basis from accrual basis to payment basis. This is at the discretion of the Commissioner and it is seldomly granted. They usually accept it on a case by case basis not a blanket approval. Perhaps if ZIMRA was to change in future and give rebates to early tax payers for tax compliance like done in the USA by the Inland Revenue Services (IRS), taxpayers would be motivated to work actively with the revenue authority.
If you need more information on this tax subject or assistance with ZIMRA negotiations please get in touch with Tanaka on landline 08677 130 017, cell 0732 469 712 or email firstname.lastname@example.org