VAT from an accounting perspective
Lots of articles and studies have been published about the VAT and its effect on the economy, business, and individuals. Elasticity is the simplest way to define the VAT effect on the economy but since the tax is 5% only, little effect will be felt on the businesses. The more the VAT rate goes upwards, the less the consumers want to spend, a higher percentage will mean fewer transactions while there would be a much higher tendency to tax fraud and evasion.
Going forward, this article is directly aimed to discuss the accounting preparations related to VAT starting with the chart of accounts:
So far, companies were not bound by any local legal obligation while drafting their chart of accounts, this must slightly change, as some adjustments should be made in order to accommodate for the VAT.
The chart of accounts should be modified taking into consideration the VAT effect on the business activity the organization is in:
– Sales ledgers that may be used to be randomly created need to be organized in a way to distinguish the sales with VAT (also divided by emirate in case the Operating System cannot provide such a data from outside the accounting system). Furthermore; Accountants will need to separate the Export Sales and divide it into “GCC export Sales” that is taxable and “Non-GCC export sales” that is Zero rated. On the other hand, 2 additional sales ledgers may need to be created for sales exempt from VAT in case the organization is dealing with such items and an additional ledger for the barter exchanges. Exports to GCC countries not applying the VAT on 1st of Jan should be considered as non-GCC sales till the date they implement VAT.
– Cost and Expense wise, accountants need to organize the chart of account in a way to separate the costs that have a recoverable tax from the ones that are related to exempt items (if any).
– Advance payments fall under VAT even before invoicing it, so a special care must be given to such accounts.
– The VAT related to the purchase of the Capital Assets (fixed assets) is considered as an input VAT and accordingly can be claimed from the authorities. (records should be kept for 10 years while other VAT related records need to be stored for 5).
– Companies will need to keep records for at least the VAT registration numbers of the clients, suppliers and other debtors and creditors that are dealing with VAT. Statement of account names will also need to be readjusted in the chart of accounts to read as per their Trade License.
– Coming to the main part of this article, the VAT accounting ledgers. The VAT is divided into Input tax, that is the VAT levied by the organization’s suppliers and creditors, and the Output tax that represents the VAT levied by the organization on its clients via sales invoices. Accordingly, 2 main ledgers should be created.
|Master Account||Description||Sub-Master Account||Description||Controls|
|441||VAT Input Tax||4410||VAT on Purchases||Should be equal to 5% of the cost of sales ledge for a given period|
|4411||VAT on Capital Purchases||Should be equal to 5% of any new fixed asset acquisition for a given period|
|4412||VAT on expenses||Should be equal to 5% of the total taxable expenses for a given period|
|442||VAT Output tax||4420||VAT on sales||Should be equal to 5% of the total taxable income for a given period (including taxable export (GCC)|
|4421||VAT on advance payments received||Advance amounts received /105 x 5 (i.e. a temporary VAT collection) as if the client is paying with VAT|
Account numbers are for indication only
Under each Sub Master Account stated in the above chart, a detailed ledger by name should be created to each supplier, client or any other debtor or creditor. The reason behind that is being able to cross check in 2 ways:
1- Total taxable sales x 5 % should be equal to the total of Sub-master A/C 4420, the same goes to all sub-master accounts as indicated above. By using any similar layout, a person will easily cross-check the figures without resorting to complex excel sheets, the accountants should immediately tackle any discrepancy as it may be a false voucher entry or something more complicated.
2- By having a detailed VAT accounts by name, the accountant can check the VAT levied on/by any specified client/ supplier without having to do any manual calculation, furthermore the simplicity if this procedure will enable the organization to answer any query raised by the authorities on a specified subject without going into multiple cross-checking.
On top of the above, an additional VAT account for the reverse charge should be kept, its balance will be constantly NIL but will be used to record (In & out) the VAT value of the import transactions that are billed without VAT (example the online purchase of a software). The reverse charge used for reporting purposes and not as a means of payment.
This is not the only way to account for VAT, but maybe the most simplified on the long run.