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Rules on VAT Apportionment that every Zimbabwean business owner must know

Input tax is the tax paid on purchases by a registered VAT operator on goods or services acquired for use, consumption or supply in the production of taxable supplies including imports made for use, consumption or supply in the production of taxable supplies. Only persons who are registered for VAT, known as registered operators are permitted to claim input tax. They may either offset it against output VAT or recover it as a refund from the ZIMRA. Taxable supplies are supplied which are charged 15% VAT, known as standard-rated supplies and those charged to tax at 0% rate are called zero-rated supplies.

The third category of supplies is called exempt supplies and individual supplying 100% exempt supplies does not charge VAT on sales nor claim input tax. An operator making both taxable and exempt supplies (non-taxable supplies) during an accounting period can claim input tax in proportion to the taxable element only as fully explained below.

Theoretically, it is easy to account for input tax when an operator only makes taxable supplies or exempt supplies. In practice, an operator will make purely taxable supplies or purely exempt supplies only in exceptional circumstances. Such a mixture of supplies gives rise to one of the most problematic areas in any VAT system, namely the question of apportionment of input tax.

Apportionment refers to the fact that only a portion of input tax that was paid is claimable – the portion not claimable will be added to the expense which will be deductible for income tax purposes under Income Tax. Where input tax is solely attributable to taxable supplies, a trader is entitled to deduct it in full from the output tax due on his taxable supplies.

On the contrary, where input tax is wholly attributable to exempt supplies, none of it is claimable. This means that the use to which input is put is important. Where this is not possible, the input tax becomes residual input tax which must be allocated by way of apportionment.  

In the event that input tax being incurred is for mixed purposes, claimable portion is calculated according to the apportionment percentage by using an approved method by the Commissioner of the Zimbabwe Revenue Authority (ZIMRA).

The only approved method which may be used to apportion input tax in terms of the Act without prior written approval from the Commissioner is the turnover-based method. The turnover-based method should be applied as follows:

                     = Taxable supplies exclusive of VAT   x total input tax

                        Total supplies (taxable plus non-taxable supplies exclusive of VAT)

When computing the income or turnover certain elements should be considered such as the cash value of goods supplied under an installment credit agreement, supplies of capital goods or services which have been used for trade purposes and the value of any goods or services supplied for which input tax deduction is always prohibited, for example, income from sale of passenger motor vehicle are excluded.

A registered operator who wants to use some other method which is not the turnover based should seek the prior approval of the Commissioner. The Commissioner would need to be satisfied that such other method fairly and reasonably represents the extent to which goods or services are used or are to be used by the registered operator in making taxable supplies.

In other words, the method must suit the special circumstances of individual registered businesses or reflect the use made by the taxable person of the relevant goods or services in making taxable supplies. The courts have held that in order for a method to be regarded as fair and reasonable it should be “sensible”, “sane”, and “not asking for too much”..

For example, what may be considered a fair and reasonable basis for apportioning the rent could be the floor space. “Taxable floor space” for this purpose means areas of the building used for making taxable supplies of building space to customers. Meanwhile, taxpayers are warned that methods which are not turnover based should be used or applied with caution because they often change with time.

The use of multiple methods notwithstanding the behavior pattern of the applicable expenses should also be avoided. Furthermore, the method so selected should be based on the information that is in possession of the taxpayer without having to resort to hiring expensive third parties, such as valuators.

The Act provides for de minimis apportionment rules. This means if the proportion of an input tax claim exceeds a given amount or ratio the registered person would be allowed full or 100 percent input tax or refund. The main purpose of this rule is to simplify VAT administration and compliance for tax officers and taxpayers.

The VAT Act makes provision for such rule and provides that where the goods or services so acquired are used at least 90 percent for the purposes of making taxable supplies, the full input tax credit may be granted. This indicates that input tax should be apportioned when the intended use of goods and services in the course of making taxable supplies is less than 90% of the total intended use of such goods and services.

There are tax implications for not apportioning input tax where goods or services are acquired for use, consumption or supply in the making of mixed supplies. ZIMRA will disallow the undue input tax and levy penalties and interest.

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Why Taxpayers must take advantage of Capital Allowances

In Income tax computation, expenditure is deducted if it has been incurred in the production of income for the purpose of trade. Expenditure on acquisition or construction of fixed assets known as Property, Plant, and Equipment (PPE) is not deducted but claimed against taxable income in the form of capital allowances over the useful life of the assets.

Capital allowances can be claimed by all persons deriving income from trade and investments namely sole traders, independent contractors, non -executive directors, partners, companies, and trusts with taxable income irrespective of the type of business undertaken. However, miners and petroleum operators have their own method of claiming capital expenditure.

Capital allowances allow the taxpayer to obtain relief on capital expenditure by deducting it against pre-tax income. If an asset is constructed or acquired in one tax year then put into use in the following year, capital allowances are only claimed in the year the asset has been put into use.

Capital expenditure includes the cost of acquiring or construction of the asset and all costs related in acquiring the asset such as initial set up, installation, programming, travel cost to purchase the asset, freight charges, transit insurance, irrecoverable VAT, borrowing cost, foreign exchange losses in respect of the asset.

There are two methods of claiming capital expenditure namely Special Initial Allowance (SIA) and Wear & Tear (W & T). SIA is a capital allowance granted upon election on constructed buildings, additions, alterations or improvement to the said buildings and movable purchased.

The act provides for 90 percent de minimis use rule, meaning that property used for at least 90 percent in the production of income for purposes of trade to be granted SIA.

The current rate for SIA is 25 percent for annum for big business and 50 percent for SMEs in the first year. After the first year, accelerated wear & tear is 25 percent per annum for the next three years in the case of big business and 25 percent per annum for the next two years for SMEs.

SIA is never apportioned, either taxpayer qualifies or does not qualify for SIA at all and it is also computed based on cost. Assets under a finance lease also qualify for SIA in the hands of the lessee.

Wear and tear is granted in all cases where SIA has never been granted. It is computed on the cost of immovable assets purchased or constructed by the taxpayer, additions, alterations, and improvements made to immovable properties and on movable property including on computer software acquired or developed. The following are rates for wear and tear on;

  • Commercial buildings – 2.5% per annum
  • Immovable property – 5 %per annum
  •  Movable property and computer software -10% on written down values.

Wear and tear is apportioned in the case of movable property used partly for business and private by the owners of the business.

Accelerating capital allowances allow taxpayers to minimize their tax liabilities, making SIA a favorable method to claim wherever possible. However, it is not beneficial for taxpayer with assessed losses which are about to expire to elect SIA because it will result in increased assessed losses which may not be recovered.

Therefore, capital allowances are incentives on capital expenditure which taxpayers must take advantage of, but it is difficult to claim these when an individual is not a registered taxpayer or has no internal system for tracking capital expenditure.