What the re-introduction of withholding vat means for your business

The URA issued a Public Notice on 26 October 2021 requiring VAT Withholding Agents to commence withholding of VAT with effect from 1 December 2021. The URA has also updated its website to include the list of taxpayers who are designated to withhold VAT.

What is withholding VAT?

Withholding VAT is a tax mechanism that requires certain taxpayers (designated VAT Withholding Agents) to withhold 6% of the taxable value on all payments made to VAT registered suppliers or to persons who are not VAT registered but making a supply for an amount equivalent to or higher than Ushs 37,500,000 (one quarter of the annual VAT registration threshold). However, designated VAT withholding agents are not required to withhold VAT on payments where the supplier is on URA’s VAT withholding exemption list. This exemption list is accessible on URA’s website.

Withholding VAT was first introduced in Uganda in July 2018. However, it was a very short-lived exercise and it was subsequently suspended in September 2018 due to the various practical implementation challenges that taxpayers faced in complying with this tax.

The Withholding VAT regime was amended from 1 July 2019 with implementation pegged to issuance of a Gazette Notice from the minister designating the VAT withholding agents. This Gazette Notice was issued on 29 May 2020, listing 1004 taxpayers, Government agencies and other organisations (increased from the original 2018 list of 680). However, the URA stayed its implementation due to the economic challenges and business interruptions caused by the Covid 19 pandemic.

How does withholding VAT work?

Assume that VAT Withholding agent purchases goods or services from a VAT registered supplier for which the supplier issues an electronic invoice for Ushs 1,180,000 (comprising the taxable value of Ushs 1,000,000 and 18% VAT amounting to Ushs 180,000). In addition, assume that the supplier of the goods/ services is not on the VAT withholding exemption list and that the electronic invoice for the goods/ services has been issued on 30 November 2021.

The supplier will account for the Ushs180,000 output VAT in its November 2021 VAT return which will be due for filing by 15 December 2021. On the other hand, the customer (purchaser of the goods/ services) will claim the input tax in the same period i.e. in their November 2021 VAT return.

Subsequently, the customer pays the invoice on 21 December 2021 for the goods/ services that they received on 30 November 2021. Since the customer in our example is a designated VAT withholding Agent, at the point of payment he will be required to withhold VAT of Ushs 60,000 which is 6% of the taxable value (i.e., Ushs 1,000,000 * 6%). The VAT withheld by the customer will be declared to the URA through the December VAT return which is due for filing by 15 January 2022.

Upon filing of the VAT return containing the withheld VAT, the supplier of the goods/ services whose VAT has been withheld will receive a certificate in their URA portal account inbox. Using the reference number on this certificate, the supplier will then claim a VAT credit which will be offset against any VAT payable in the subsequent return.

A supplier who finds themselves in a VAT credit position for the relevant month e.g., where the VAT input tax exceeds output tax) will either have to carry the VAT credit forward for utilisation in the future when the company has VAT to pay or apply for a refund from the URA.

The URA has not provided for a transition period for VAT withholding. This means that payments made in respect of invoices issued prior to 1 December 2021 will be subject to VAT withholding if they are paid after 1 December 2021.

Impact of withholding VAT on businesses

Uganda has a separate withholding tax regime which is a form of advance income tax imposed under the Income Tax Act (ITA). Under the ITA withholding tax regime, designated Withholding Agents are required to withhold tax at a rate of 6% on the gross amount paid (excluding VAT) for the supply of goods or services in aggregate exceeding one million shillings. Again however, the designated withholding agent is not required to withhold tax on payments where the supplier is on the withholding income tax exemption list. This exemption list is also accessible on URA’s website.

If the payment in our example above is made to a supplier who is not on the income tax withholding exemption list, and the customer (purchaser of the goods/ services) is a designated ITA Withholding Agent, this payment will also be subject to the 6% income tax withholding. This means that the customer  will be required to deduct an additional Ushs 60,000 and pay this to the URA as declared in the December 2021 withholding tax return due for filing by 15 January 2022.

In such a case, the total withholding (VAT and income tax) will amount to Ushs 120,000 (12% of the invoice value).

This will pose a significant additional cashflow constraint to businesses who may already be grappling with working capital stresses as they recover from the effects of the Covid 19 pandemic. The cashflow impact will be worsened for businesses that find themselves in a perpetual VAT refund position as such companies are often subjected to lengthy URA refund audits before their refunds are granted.

In addition, many businesses have recently incurred significant costs to implement the Electronic Fiscal Reporting and Invoicing System (EFRIS) which was effected by the URA from January 2021 to curb revenue leakage. The re-introduction of withholding VAT means that those entities who are VAT withholding agents now have to incur additional costs to upgrade their systems to cater for the VAT withholding.

As part of Government’s effort to support businesses to recover from the impact of the pandemic, it might be instructive to revisit the reasons for revocation of the prior VAT withholding regime from a practical compliance viewpoint and assess whether its re-introduction is actually warranted.

By Juliet Najjinda, a Tax Manager with PwC Uganda