New tax offset rules can streamline cash flow for Ugandan SMEs

August 26, 2024 in Financial Services, Opinion by Editor

Mirembe says for SME owners, there are several advantages arising from this amendment, notably a reduced administrative burden in carrying out recurring audits. This means the frequency of refund audits for SMEs is likely to reduce.

Recently President Yoweri Museveni assented to the amendments to the Valid Added Tax (VAT) Act that came into effect at the beginning of July this year. These changes carry several implications for small and medium business owners (SMEs) writes Ritah S. Milembe.

One of the amendments is that where the taxable person’s input credit exceeds his or her liability for tax for that period by less than UGX 10 million, the URA Commissioner General shall offset this amount against the future liability of the taxable person. Exceptions are in the cases of a licensee, an investment trader or person providing mainly zero-rated supplies.

In other words, this amendment increases the VAT threshold of the offset in case of overpaid tax from the previous UGX 5 million to UGX 10 million. However, it is important to clarify how a VAT claim position arises.

In this context, it is when a taxpayer’s VAT on eligible purchases (input tax) exceeds VAT on sales (output tax) for a period (which is a calendar month). VAT on purchases arises when a registered business pays for goods and services locally or imports goods from overseas for use in their business.

For SME owners, there are several advantages arising from this amendment, notably a reduced administrative burden in carrying out recurring audits. This means the frequency of refund audits for SMEs is likely to reduce.

However, it is important to note that for a taxpayer to receive a cash refund of overpaid tax, URA usually conducts a tax audit on all tax heads an entity is registered for.  The initiation of such audits comes under the Tax Procedures Code Act which provides that where the Commissioner is satisfied that tax has been overpaid, the Commissioner shall apply the excess in reduction of any other tax due from the taxpayer.  Or apply the balance of the excess, if any, in reduction of any outstanding liability of the taxpayer to pay taxes not in dispute or to make provisional tax payments during the year of income in which the refund is to be made and refund the remainder, if any, to the taxpayer.

This implies that the audit from the refund application by a taxpayer is not only limited to a review of the VAT return from which it arises, but if the URA deems it so, it also could be used to offset liabilities arising from the other various tax heads. Increasing the VAT threshold, therefore, will reduce the frequency of the audits.

Now, let us look at an example where the amount is below UGX 10 million, especially in situations where the cause of the offset was a one-off transaction. A taxpayer can continue to carry forward the offset amount to such a point in time when offset is fully utilized.  The amendment invokes management of cash flows for small and medium companies.

Cash flow management involves monitoring, analysing, and optimizing the inflows and outflows of cash in an organisation and ensures that there are sufficient funds available to meet the entity’s financial obligations.

Carrying forward a tax credit reduces cash outflows in form of tax payments for businesses by utilising the offsets hence boosting their financial muscle in terms of making investments and meeting other obligations.

Unfortunately, in certain instances, unscrupulous taxpayers will issue invoices in EFRIS for goods not sold, purposely to keep offsets within limits of the threshold.

In a nutshell taxpayers are encouraged to engage their tax advisors  to carry out independent reviews to confirm the recoverability of the offset so that one does not carry an unsupported receivable in the books of accounts. This is because with the increase in the threshold, the tax recoverable could cut across into the next financial year of the taxpayer.

The VAT offset threshold uplift from UGX 5 million to UGX 10 million offers significant benefits for SMEs in Uganda, including reduced administrative burdens, improved cash flow management, and mitigation of artificial offset utilization. By understanding these implications, SMEs can optimize their tax compliance and financial management strategies.

Ritah. S. Mirembe is a Senior Tax Advisor at E&Y Uganda. The contents of this article are her personal views and not those of E&Y.