Lawyers, unlike accountants are bound by client confidentiality

The article below is a reminder that unlike accountants, auditors and other consultants and service providers, lawyers are bound by client confidentiality rules and can not freely avail client information even in regard to a client’s tax affairs. Privilege Regina … Continue reading →

Share this:

In the case of Frank Hudson Transport Ltd V HM Revenue & Customs, the tax authority argued successfully that where a company actually pays the finance costs of purchasing a car, there can be a taxable benefit on the director who drives it, even if these costs are actually charged against the individual director’s personal loan account balance with the company.

Wherever the company in question bought a new car, any finance contracts were arranged in the name of the company, with the directors repaying these amounts via their directors’ loan accounts. The first tier tribunal took the view that the taxpayer did, in fact receive a taxable benefit from this arrangement. It ruled that the finance agreements in the company’s name resulted in a smaller overall cost to the company, and hence, the employee.

This is an interesting development. When quantifying the taxable benefit, the established principle of of ‘ costs to the provider’ seems to have been extended here to include a hypothetical cost, which was never actually incurred by anyone.

The above title and following excerpt are found on page 46 in the ‘Briefings’ section under Taxes in the January 2011 publication of the Chartered Secretary magazine. Over to you East African revenue collection Authorities.

Related articles

• Are auto accident insurance proceeds taxable? (autoinsurance.org)

Yes, The VAT Act exempts financial institutions from this tax

Some Banks and other financial institutions in Uganda today, register for and pay VAT regardless of exemption of financial services from Value Added Tax (VAT). The supply of financial services is an exempt supply for the purposes of section 19 of the VAT Act cap 349. Exempt supplies in lay terms are supplies that are exempt from VAT. Financial services means granting, negotiating and dealing with loans, credit, credit guarantees, and any security for money, including management of loans, credit, or credit guarantees by the grantor.

The services also include transactions concerning deposit and current accounts, payments, transfers, debts, foreign currency sales and purchases, cheques and negotiable instruments, other than debt collection and factoring, transactions relating to shares, stocks, bonds and other securities, other than custody services, the management of investment funds; but does not include provision of credit facilities under a hire-purchase or finance lease agreement.

The rationale behind the tax policy that led to financial services being exempt supplies was to promote and grow the financial services sector in Uganda. The sector has indeed grown with an individual having a choice over which bank, micro finance institution or forex bureau to use all over the country. There is also a variety of services offered by the banks from salary and car loans, Automatic Teller Machines (ATM) services to the more sophisticated like electronic money transfers.

Some banks and other finance institutions took the tax exemption literally and did not register for VAT. However, others followed the prudent but costly approach and registered for VAT regardless of the exemption. In registration for VAT, a number of advantages are given like the credit worthiness of the business and the use of VAT returns. These advantages were mentioned in my last article titled: When to register for VAT as below.

There are benefits to Voluntary Registration and these include: One dealing in zero rated or mostly zero rated supplies would be able to claim input tax credit and even cash refunds, it opens up one to more business opportunities e.g. big firms tend to prefer dealing with fellow registered firms as the payment of VAT can sometimes be used as a benchmark to determine the reputation of a business. Registration is also advantageous because a registered person can issue tax invoices to customers who in turn can utilize them to claim VAT incurred, there is a defined risk reduction on the penalty for not registering for VAT in time i.e. by the time one’s turnover exceeds the required threshold, the person is already registered.

The disadvantages of Voluntary Registration which would also affect the suppliers of financial services include: The registered person must file monthly tax returns even where no sales have been made; and failure of which the person incurs penalties, the business incurs the cost of printing tax invoices, some small businesses incur extra costs of a consultant to compute the tax and one must stay on register for a period of two years.

The question is, with the exemption of the supply of financial services from VAT, is it necessary for the players in the financial services sector to register for VAT as some have done in the past? Would their input VAT exceed output VAT to warrant VAT refunds? Even with the relatively new e-tax on-line filing of VAT returns and automated accounting systems, doesn’t the payment of VAT affect the profit margin or is it passed onto the final consumer, the customer? All is well with the institutions that decide to voluntarily register as it is their choice. But wouldn’t all financial institutions benefit from a waiver of VAT as was originally intended when classifying financial services as exempt supplies?

Unlike some other businesses that need to use VAT returns filed with the Uganda Revenue Authority as a form of credit worthiness, the Bank of Uganda as a regulatory authority, has done a good job supervising the banking sector in Uganda. And unlike some businesses, banks and other financial institutions when licensed, would ordinarily not need a VAT return to prove their credit worthiness. Before the blame is put on the Uganda Revenue Authority for being an exuberant tax collector, one must know that not all financial institutions register for VAT and those that do, register only under voluntary registration. However, after registration, the Uganda Revenue Authority is bound to collect VAT from the financial institutions that have registered and one cannot cry foul over something they did voluntarily.

The decision for the registered financial institutions to deregister should not be taken lightly as it involves an application to the Commissioner General of the Uganda Revenue Authority to deregister and a two year waiting period before the institution is deregistered. During the two years waiting period, the institution must file the mandatory monthly VAT returns. Before applying to deregister, the financial institution must consider the bulk of its supplies as the provision of credit facilities under a hire purchase or finance lease agreement is not exempt from VAT.

I decided to publish the above article again after I received an e-mail request to clarify how much VAT a borrower is supposed to pay on loans of 2 million Uganda Shillings and below, soon after the reading of the 2011-2012 budget by the new Honourable Minister of Finance Maria Kiwanuka.

Share this:

Image via Wikipedia

Some Banks and other financial institutions in Uganda today, register for and pay VAT regardless of exemption of financial services from Value Added Tax (VAT). The supply of financial services is an exempt supply for the purposes of section 19 of the VAT Act cap 349. Exempt supplies in lay terms are supplies that are exempt from VAT. Financial services means granting, negotiating and dealing with loans, credit, credit guarantees, and any security for money, including management of loans, credit, or credit guarantees by the grantor.

The services also include transactions concerning deposit and current accounts, payments, transfers, debts, foreign currency sales and purchases, cheques and negotiable instruments, other than debt collection and factoring, transactions relating to shares, stocks, bonds and other securities, other than custody services, the management of investment funds; but does not include provision of credit facilities under a hire-purchase or finance lease agreement.

The rationale behind the tax policy that led to financial services being exempt supplies was to promote and grow the financial services sector in Uganda. The sector has indeed grown with an individual having a choice over which bank, micro finance institution or forex bureau to use all over the country. There is also a variety of services offered by the banks from salary and car loans, Automatic Teller Machines (ATM) services to the more sophisticated like electronic money transfers.

Some banks and other finance institutions took the tax exemption literally and did not register for VAT. However, others followed the prudent but costly approach and registered for VAT regardless of the exemption. In registration for VAT, a number of advantages are given like the credit worthiness of the business and the use of VAT returns. These advantages were mentioned in my last article titled: When to register for VAT as below.

There are benefits to Voluntary Registration and these include: One dealing in zero rated or mostly zero rated supplies would be able to claim input tax credit and even cash refunds, it opens up one to more business opportunities e.g. big firms tend to prefer dealing with fellow registered firms as the payment of VAT can sometimes be used as a benchmark to determine the reputation of a business. Registration is also advantageous because a registered person can issue tax invoices to customers who in turn can utilize them to claim VAT incurred, there is a defined risk reduction on the penalty for not registering for VAT in time i.e. by the time one’s turnover exceeds the required threshold, the person is already registered.

The disadvantages of Voluntary Registration which would also affect the suppliers of financial services include: The registered person must file monthly tax returns even where no sales have been made; and failure of which the person incurs penalties, the business incurs the cost of printing tax invoices, some small businesses incur extra costs of a consultant to compute the tax and one must stay on register for a period of two years.

The question is, with the exemption of the supply of financial services from VAT, is it necessary for the players in the financial services sector to register for VAT as some have done in the past? Would their input VAT exceed output VAT to warrant VAT refunds? Even with the relatively new e-tax on-line filing of VAT returns and automated accounting systems, doesn’t the payment of VAT affect the profit margin or is it passed onto the final consumer, the customer? All is well with the institutions that decide to voluntarily register as it is their choice. But wouldn’t all financial institutions benefit from a waiver of VAT as was originally intended when classifying financial services as exempt supplies?

Unlike some other businesses that need to use VAT returns filed with the Uganda Revenue Authority as a form of credit worthiness, the Bank of Uganda as a regulatory authority, has done a good job supervising the banking sector in Uganda. And unlike some businesses, banks and other financial institutions when licensed, would ordinarily not need a VAT return to prove their credit worthiness. Before the blame is put on the Uganda Revenue Authority for being an exuberant tax collector, one must know that not all financial institutions register for VAT and those that do, register only under voluntary registration. However, after registration, the Uganda Revenue Authority is bound to collect VAT from the financial institutions that have registered and one cannot cry foul over something they did voluntarily.

The decision for the registered financial institutions to deregister should not be taken lightly as it involves an application to the Commissioner General of the Uganda Revenue Authority to deregister and a two year waiting period before the institution is deregistered. During the two years waiting period, the institution must file the mandatory monthly VAT returns. Before applying to deregister, the financial institution must consider the bulk of its supplies as the provision of credit facilities under a hire purchase or finance lease agreement is not exempt from VAT.

I decided to publish the above article again after I received an e-mail request to clarify how much VAT a borrower is supposed to pay on loans of 2 million Uganda Shillings and below, soon after the reading of the 2011-2012 budget by the new Honourable Minister of Finance Maria Kiwanuka.

Related articles

• How to utilise credit notes for VAT in Uganda (renderuntoceaser.wordpress.com)
• Value Added Taxes Around the World (turbotax.intuit.com)
• Taxation of employee benefits and Pay As You Earn (renderuntoceaser.wordpress.com)
• Financial services are exempt from VAT (renderuntoceaser.wordpress.com)

The cost of Employee repatriation and medical reimbursement benefits

 

Reference is made to the article titled ‘Taxation of employee benefits and Pay As You Earn’, where employees capitalize on the benefits offered to apply for and keep jobs with particular organizations. Whereas all benefits linked to the employee are taxable to the employee, the Income Tax Act has exceptions to the rule. These exceptions are deliberately not included in the definition of employment income. These exceptions are expenses directly incurred by the employer and cannot be taxed under Pay as you earn. They are under section 19(2) and this article specifically highlights (a) passage to and from Uganda and (b) the discharge of employees’ medical expenses:

Employment income does not include the cost incurred by an employer for transport to and from Uganda in regard to the employee’s appointment or termination of employment where the employee was recruited or engaged outside Uganda, is in Uganda solely for the purpose of serving the employer and is not a citizen of Uganda. This means that on recruitment of a non-resident to work in Uganda, his/ her employer will have to pay for transportation to Uganda at the beginning of employment and pay for transportation back home at the end of the employee’s employment.

The employer has to look at the value the prospective employee is bringing to his business and compare it to the transport costs. Sometimes’ the employee might want to bring his/ her whole family to Uganda but the employment Act mandates payment and the Income Tax Act only allows a tax deduction for the employee and not for the whole family. If the prospective employee is very valuable to the business, the employer will have no problem paying passage for the employee’s dependants. However, this expense is taxed to the employer.

There have been instances where an employee does not have a problem paying out of pocket expenses to transport his dependants, but that expense, is not tax deductible to the employee and the employee still has to pay PAYE before the transport expense. This provision of transport is different from transport allowance given to a person resident in Uganda, which is employment income under section 19(1) and is taxed under the PAYE scheme.

This section makes it difficult for some Ugandan employers to recruit outside Uganda as the cost of passage to and from Uganda might be expensive. In retrospect, similar repatriation sections in the employment and tax acts of other countries deter employers who cannot bear the burden of repatriation expenses from hiring Ugandan employees.

Medical is one of the most coveted benefits by employees in Uganda especially since there is currently no national medical insurance scheme. In reference to section 19 of the Income Tax Act, reimbursement or discharge of the employee’s medical expenses is also not included in employment income. It is not mandatory for an employer to pay for the employee’s medical expenses and that is why employees deliberately look for jobs where medical health benefits are given. Medical allowance is not to be confused with reimbursement or discharge of the expenses. Medical allowance is money given to the employee and should be rightly taxed under section 19(1)as part of employment income, while a reimbursement is the refund given to the employee for spending his own money on medical expenses and should not be taxed as under section 19(2). Discharge of an employee’s medical expenses occurs where the employer pays the employee’s medical expenses directly. This can be through an arrangement with a specific hospital or clinic that sends invoices to the employer after an employee has received treatment there. Some employees prefer this method as they do not have to fill in reimbursement vouchers, attach the relevant receipts, and even have some employers call the health service providers to confirm the cost of treatment given to the employees.

The down side to the reimbursement or discharge of the employee’s medical expenses is sometimes the employee has no privacy and the employer might get access to the employee’s health details through invoices or receipts. But the section is open and allows for the discharge of any of the employee’s medical expenses.

This is where some employers get creative and offer to pay medical expenses for only some medical ailments. Some establishments have no problem paying for an employee’s wife’s full maternity bills while others are fine with just following the statutorily given 4 days paternity leave. Some establishments pay full opticians’ and dental bills while others caution employees against eating too many sweets. The possibilities for health benefits offered to the employee are endless and it is up to the employers to determine what they can afford to provide. But it is mandatory for employers to have a safe working environment for their employees under the employment Act, and it is the obligation of any employer to provide for the employee on injury under the Worker’s compensation Act.

The repatriation of a non-resident employee is not taxed on the employee or employer. Medical allowances are taxed to the employee while provision of medical reimbursement or discharge of medical expenses is a cost borne by the employer and is not taxed if the employer can show that the expense was incurred in the production of income.

Related articles

• Taxation of employee benefits and Pay As You Earn (renderuntoceaser.wordpress.com)

Taxation of employee benefits and Pay As You Earn

Most job seekers in Uganda dream of getting employed in organizations with benefits that are useful to them aside from the expected monthly salary. Some of the benefits that the un-employed and some employees see their colleagues enjoying include a company car, company house, access to the internet at work, access to the organization’s medical scheme, payment of fees for professional courses like ACCA, allowances, the list of benefits is endless depending on the creativity of the employers and their professional advisors.

The motivations for a payment strategy by an employer include: to attract and retain the best possible employees; to make one an employer of choice by distinguishing one’s business from the crowd; to generally enhance status, not just in the eyes of the employees but also in the eyes of customers and other parties; to drive certain behaviours; for philanthropic reasons; to align shareholder and management interests; because the nature of the business lends itself to certain benefits (e.g. discounted products); because the employer can get better group rates of life cover than those available to individuals; to boost morale; or there is a legal requirement to do so(e.g. the contribution of by employer with more than 5 permanent employees to the National Social Security Fund pension scheme).

What some employees and employers may not know, is that not all allowances and benefits to motivate employees are tax exempt. A list of benefits is added up to get the employee’s gross employment income and taxed each month under part 1 of the third schedule to the Uganda Income Tax Act, which has the individual income tax rates commonly known as Pay As You Earn. Pay As You Earn is the tax paid by the employee from income derived from employment. For the purposes of income tax, the Act defines an employee as an individual engaged in employment, an employer means a person who employs or pays an employee and employment means the position of an individual in the employment of another person or the directorship of a company, a position entitling the holder to a fixed or ascertainable pay or the holding or acting in any public office.

The entire list of benefits to be taxed from the employee’s gross income is enshrined in the definition of employment income below. The Uganda Income Tax Act defines employment income as any income received by an employee from any employment and includes any wages, salary, leave pay, payment in lieu of leave, overtime pay, fees commission, gratuity, bonus, or the amount of any travelling, entertainment, utilities, cost of living, housing, medical or other allowance.

This goes on to include: the value of any benefit granted as under the fifth schedule of the same Act; reimbursement by an employer of expenditure incurred by an employee on the employer’s behalf which does not serve the proper business purposes of the employer; any amount termed as compensation for the termination of an employment contract; any amount paid by a tax exempt employer as a premium for insurance on the life of an employee for the benefit of the employee or her dependants; any amount received as consideration for the employee’s agreement to any conditions of employment or to any changes in his or her conditions of employment; the amount by which the value of shares issued to an employee under an employee share acquisition scheme at the date of issue exceeds the consideration given by the employee for the shares including any amount given as consideration for the grant of a right or option to acquire the shares; the amount of any gain received by an employee on disposal of a right or option to acquire shares under an employee share acquisition scheme.

The duty to calculate an employee’s employment income and remit the subsequent Pay as You Earn tax to the Uganda Revenue Authority lies with the employer. And failure to do so is an offence of which there are penalties.

Related articles

• 10 Guaranteed Ways to Make Your Employees Unhappy (brighthub.com)

Share this:

Image via Wikipedia

Case study as at the East Africa School of Taxation: Kigwa & brothers Limited raised an invoice worth Shs. 100,000,000 in June 2010 to Fina associates. But goods were delivered 25 August 2010. On 10 October 2010, Fina associates made a payment of Shs. 75,000,000 and informed Kigwa & brothers Limited that goods worth Shs. 15,000,000 had been found damaged and were returned on 09 September 2010.

The Managing director of Kigwa & brothers Limited insisted that Fina associates should pay the balance with immediate effect since his company had already declared and account for the tax on the sale to Uganda Revenue Authority (URA). One of the ways to proceed is found under section 14 of the VAT Act Cap 349.

Under section 14 of the VAT Act, the time of supply refers to the date on which the supply is deemed to have taken place. It is useful in that it determines that tax point. The tax point determines the tax period in which output tax should be accounted for and credit for input tax should be claimed. The rate of tax also helps in determining the rate at which tax is payable. It also determines the conversion rates for foreign currency.

For an ordinary supply, it is the earlier of the following: the invoice date, the payment date or the delivery date. In the case of Kigwa brothers, the tax point is June 2010 when the invoice was raised. The tax period is the month ended June 2010. However, the declaration and accounting for VAT to the URA does not necessarily mean that Fina Associates should pay the full amount even for the returned goods.

Section 22 of the VAT Act deals with adjustments to tax and adjustments under this section are meant to cater for the taxable person selling and not the one purchasing. A tax can be adjusted where the supplier has issued an invoice in respect of the supply or accounted for the tax on the supply and Kigwa did both.

The circumstances that would lead to an adjustment in tax are: when the supply is cancelled. This should be evidenced by the original invoice marked cancelled. In an automated system there should be a reversal or the transaction with the particular serial number. Where the price is changed and this could be down wards leading to a reduction in output tax or upwards leading to an increase in output tax. The causes could be discounts offered, mistakes and others. When the supply has been fundamentally altered; for example, the supply of vita foam mattresses being changed to the cheaper crest foam mattresses or vice versa. Or where there are returns inwards. This could be due to damaged goods, unwanted goods, and delivery over order quantity, high price or others

In the case of Kigwa, there was a returns inwards and therefore Kigwa has a right to a tax credit where the new adjusted position leads to a reduction in the supply as under section 22 (4). Adjustments downwards are by issue of a credit note by a taxable person (Kigwa) to his customer Fina Associates.

Where a tax invoice has been issued as a result of an adjustment (sec 22(1) (e), and the amount shown as tax charged on the tax invoice exceeds the tax properly chargeable in respect of the supply, the person making the supply (the seller) shall provide the recipient of the supply (buyer) with a credit note containing, unless the commissioner provides otherwise, the following particulars;

a) The words “credit note” in a prominent place;

b) The commercial name, address, place of business, and the tax identification and VAT registration numbers of the taxable person making the supply;

c) The commercial name, address, place of business and the tax identification and VAT registration numbers of the recipient of the taxable supply;

d) The date on which the credit note was issued;

e) The rate of tax; and

f) Either; (i) the taxable value of the supply shown on the tax invoice, the correct amount of the taxable value of the supply, the difference between those two amounts, and the tax charged that relates to that difference; or

(ii) where the tax charged is calculated under section 24 (2), the amount of the difference between the taxable value shown on the tax invoice and the correct amount of the taxable value and a statement that the difference includes a charge in respect of the tax; and

g) A brief explanation of the circumstances giving rise to the issuing of the credit note; and

h) Information sufficient to identify the taxable supply to which the credit note relates.

Therefore, instead of asking Fina associates to pay the full price including that of the goods returned, the Kigwa & brothers Managing Director can issue Fina associates with a credit note and claim the input VAT on the goods which were returned. The goods returned to a tune of Shs. 15,000,000 have VAT of Shs. 2,700,000.

Related Articles

• VAT Recovery Issues – Receivers (propertyparalegal.wordpress.com)
• Financial services are exempt from VAT (renderuntoceaser.wordpress.com)
• How correctly applying Value Added Tax law can boost cashflow. (irishtaxnews.wordpress.com)