As we approach the due date for the 2024 Income tax return, we have decided to explore some of the mistakes which taxpayers make when they are doing their income tax computations.
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Income Tax and VAT Turnovers Reconciliation.
The reconciliation of Income Tax and Value Added Tax (VAT) turnovers is a crucial process for businesses to ensure accuracy, compliance, and consistency in their financial reporting and tax obligations. While income tax and VAT are distinct taxes with different bases, reconciling their turnover figures can provide valuable insights and help identify potential discrepancies or errors.
Income Tax Turnover: This generally refers to the total revenue a business earns from its operations during a specific period, as reported for income tax purposes. The definition of turnover for income tax can vary depending on the specific tax laws and regulations of a jurisdiction.
VAT Turnover (Taxable Turnover): This refers to the value of taxable supplies of goods and services made by a VAT-registered business. It’s the base on which VAT is calculated. Not all income tax turnover is subject to VAT (e.g., exempt supplies).ZIMRA often look for consistency between income tax and VAT filings. Reconciling turnovers proactively can help businesses identify and rectify discrepancies before a tax audit, reducing the risk of penalties and interest.
The revenue recognition under the Income Tax Act and VAT Act is based mainly on the same principles. Therefore, there is an expectation from the ZIMRA that at the end of each year of assessment, the turnover on the VAT7 and ITF12C should be the same.
In the event there is an unexplained variance between the two ZIMRA may assess additional tax liabilities. The ITF12C and VAT 7 should be the same in that all sections for supplies should be completed and credit notes should be reported. Reconciling items will nevertheless exist because of the different treatment of deferred or prepaid income and deposits under VAT compared to income tax. Under VAT these are taxed when received should they be linked to taxable supply and later under Income Tax when services or goods are rendered or delivered.
Why This is Crucial?
Businesses should ensure all spaces for supplies on the VAT return namely space for goods or services taxed at 15%, zero goods or services and exempt goods or services are completed. All incomes fit in these spaces whether it’s the business’s normal revenue or other incomes such as dividend, bank interest, interest on debtors or staff advances or loans, foreign exchange gains etc. Any credit and debit notes must be adjusted under both tax heads. Monthly turnover reconciliations are recommended to reduce volume of work required at year end.
In conclusion, reconciling income tax and VAT turnovers is a valuable internal control and compliance measure. It helps businesses ensure the accuracy of their financial reporting, identify potential errors, and maintain consistency in dealings with ZIMRA.
