When it comes to accounting for your value-added tax, it is essential to keep good records so that you can track the VAT on your inputs and outputs. What are the best practices for setting up a good system for accounting for your value-added tax?
If your annual turnover exceeds ZMW800,000, which is the minimum amount required for you to register for value-added tax, you need to be very cautious about how you keep your records. These records include your sales and purchase invoices. Remember, in my previous article, I described the invoice recognized by ZRA. You must review the key features of a tax invoice recognized by ZRA because you can only claim input VAT on tax invoices that meet all the features indicated by ZRA when it comes to claiming your input VAT.
Keep good records of all your business transaction
The first best practice when setting up a good system for accounting for your value-added tax is to ensure that you keep good records of all your business transactions, including your sales and purchases, for which you charge output VAT and pay input VAT, respectively. If you are a small business that has just turned over 800,000 and does not yet have an accounting system set up, I would encourage you to keep separate folders for vatable and non-vatable invoices for both your sales and purchases.
For filing, it doesn’t matter the size of your business. Good filing is what determines what goes into the system. If you are big enough or can afford to set up an accounting system, it is essential to look for a system that can save you time when it comes to computing the VAT liability and submitting the VAT return to ZRA. So, if you have set up an accounting system to account for your value-added tax, make sure you keep good records of all your business transactions
Set a system that complies with the Zambia Revenue of Authority (ZRA)
You also need to ensure that your system complies with ZRA’s requirements. In the past, there was a list of accounting packages that you could find in a PDF copy on the ZRA website. However, when I recently searched for it, I couldn’t find it. The concept of these accounting packages is that they must have key features that ZRA is looking for. So, whatever accounting package you’re using, it’s a requirement that you go to ZRA and ask them to review your accounting package to see if it complies with ZRA’s requirements.
In terms of issuing a tax invoice from your system, ZRA has identified specific features that must be present. For example, if an invoice is deleted or canceled on the accounting system, it should not be reused. However, some accounting software allows you to cancel, delete, or edit an invoice, which ZRA does not permit. Instead, once an invoice is canceled or deleted, you should issue a new invoice. Although there is a list of accounting packages that are in compliance with ZRA’s requirements, this should not discourage you from having ZRA review the accounting system you’re using. If you feel it meets the key features that ZRA is looking for, you can still ask them to review it.
Set up for value-added tax rates
Once you’ve checked your accounting system with ZRA, you now need to set it up for the value-added tax. Review the chart of accounts in your business and identify specific items in your business transactions, such as sales and expenses. As you go through your list of different sales and expense categories, you need to determine which items are standard-rated (16%), which items are zero-rated, and which items are exempt. For example, zero-rated items could include exports, while exempt items could include education and health services.
An example of a bakery is if you run a bakery, you sell bread and you also buy flour. Maybe you also sell drinks. The question you need to ask yourself is: Is bread a standard-rated product or not? Is the cake a standard-rated product or not?
There’s a list of exemption and zero rating orders issued by the Ministry of Finance that you can find online. Look for these exemption rating orders as well as the zero-rating order. You can find all the items that fall under exempt, as well as those that fall under zero rating. And if you’re not sure, you can ask ZRA to find out whether your items are zero rated or standard rated, or exempt. It’s very important that you actually do that.
Note the tax rates
As you go through your transactions, both for your sales and your expenses, you need to note down the tax rate ratings. For example, bread is a zero-rated item. So, every time you sell bread, the type of tax you’re going to choose is zero. Cakes, unfortunately, are not zero-rated. They’re actually standard-rated. So, when you sell a cake, you’re going to choose the standard rate of 16.
When it comes to your expenses, the flour that goes into making that bread – is it zero-rated, exempt, or standard-rated? Flour is actually zero-rated. So, when you buy flour, you expect your supplier to indicate a zero rate on the invoice for the flour.
Every business has its own different types of sales and expenses, and different rules apply. So, you need to check all the items that make up your chart of accounts and what rating they have when it comes to VAT.
With some accounting packages, once you create VAT rates: standard-rated, exempt, and zero-rated, every time you issue a tax invoice, it’s going to automatically pick a rating depending on how you’ve set up your system.
For example, if I’m selling bread and I set the tax rate at zero rated for bread, every time I issue an invoice for my client, it’s going to pick zero percent. If I sell a cake, every time I sell the cake as long as I issue a tax invoice, it’s going to pick the standard rate of 16.
Tax rate
When setting up a good accounting system, always think about the tax rate that applies to every particular item of your business When it comes to your inputs – your purchases – you need to be very careful with value-added tax (VAT) on your inputs because VAT on your inputs goes towards reducing your VAT liability. If you look at the VAT equation, VAT is computed as output VAT minus input VAT, which gives you the VAT liability or the amount due or claimable from the Zambia Revenue Authority (ZRA).
If your business naturally has a VAT liability or VAT due to ZRA, the best way to reduce that liability is by keeping good records of your inputs or your purchases. When you are in business, always work with VAT-registered businesses, as long as you are registered for VAT. This is a key requirement. Don’t buy your inputs from non-VAT registered suppliers because that will actually increase your VAT liability.
If you buy a product from a non-VAT registered supplier, you cannot claim that VAT. As a result, you end up paying ZRA more than you should have. You could have claimed a reduction in VAT through your input. Always work with suppliers that are registered for VAT and get their TPIN. In fact, as you are going to see when you start submitting the VAT return, you cannot submit a VAT return without knowing the TPIN of your supplier. A well-set-up accounting system has all the tax invoices for their suppliers, even their customers.
For those of us that are in business and would love to set up a good accounting package, there are several packages available. You can contact me. I actually love to set up accounting systems for businesses. So, if you’ve got an accounting package and you’re not really sure how it was set up, you can email me at [email protected], and I am going to give you specific advice with regards to setting up a good accounting system that accounts for your VAT correctly and helps you reduce your VAT liability.
Your VAT liability is calculated by taking into account all your deductions, including input VAT. A properly set up accounting system should have a VAT control account as part of your chart of accounts. This account allows you to account for VAT every time you charge VAT on your sales. The portion of the value-added tax that you charge on your sales goes to the VAT control account. Additionally, every time you incur an expense, whether it’s a direct or general expense, the portion of input VAT also goes to the VAT control account. By the end of the month, the difference between your output VAT and input VAT gives you your VAT due or the VAT that you can claim from ZRA.
Every time you make a payment of this VAT, you are also supposed to post it against your VAT liability, so that it reduces your VAT liability in a particular month. This account is always increasing and reducing. Increasing with the right liability and reducing any payments or claims that you’ve made from ZRA. When you set up a good accounting system, you’re actually able to keep track of your liability in this way.
So, if you don’t have an accounting system, you can work with Excel. Once you’ve got your records kept properly and neatly, all you need to do is every month have a tab for your sales and another tab for your expenses.
It’s also very important for you to keep an eye on your zero-rated products as well as exempt products. When it comes to zero-rated items, it’s not a must that they will forever be zero-rated. That is why again I keep emphasizing listening to the Minister’s Annual Budget because, in that budget, some items might just be moved from a zero rating to a standard rate. For example, recently newspapers and booklets have moved, even online publications, from zero rating to standard rating. This is affecting businesses that are in publishing as well as in newspaper distribution and production. So, it’s always important for you to know which items are zero-rated, which items are standard, and which items are exempt.
