VAT Apportionment rules

Input tax is tax incurred by a VAT registered operator on goods or services acquired for use, consumption or supply in the production of taxable supplies including that incurred on imports 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 supplies which are charged to VAT at 15 percent, known as standard rate supplies and those charged to tax at zero percent are called zero-rated supplies. A third category of supplies is called exempt supplies and a person supplying 100% exempt  supplies does not charge VAT on his 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 more 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 and will be deductible for income tax purposes when the business is assessed for income tax. Where possible, input tax suffered should be attributable directly to related supplies based on the actual or intended use of goods or services when they are received. Where input tax is exclusively attributable to taxable supplies, a trader is entitled to deduct it in full from the output tax due on his taxable supplies. In contrast, where input tax is exclusively attributable to exempt supplies, none of it is claimable. This means that the use to which an input is put is important. Input tax can only be attributable if the whole of the supply to which the input tax relates is used for either exclusively taxable or wholly exempt supplies, and there is a direct or an immediate link. Where this is not possible, the input tax becomes residual input tax which must be allocated by way of apportionment.  

Therefore in the event of input tax being incurred for mixed purposes, claimable portion is calculated according to the apportionment percentage by using an approved method of 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 guidance on how the turnover-based method should be applied is taxable supplies exclusive of VAT divided by the total supplies (taxable plus non-taxable supplies exclusive of VAT) multiplied by total input tax incurred. When computing the income or turnover certain elements such as the cash value of goods supplied under an instalment 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 denied e.g. 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 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. Use of multiple methods notwithstanding the behaviour pattern of the applicable expenses should also be avoided. Further, 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 these rules 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, 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 ramifications 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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