VAT Deduction at Source: Five Issues Corporate Finance Teams Should Review

Deduction at source is administered transaction by transaction, by people whose job is to pay suppliers rather than to interpret VAT. That is not a criticism of the process; it is a description of where exposure accumulates. These five questions can be asked without specialist help, and they surface most of what goes wrong.

1 · Is the supply within scope at all?

Deduction obligations attach to particular kinds of supply, and the commonest error is applying them by habit — to every invoice from a category of supplier, or to none. Both directions cost money, and over-deduction is harder to recover than under-deduction is to correct.

2 · Who carries the obligation?

Where an intermediary, an agent or a group entity sits in the chain, the party that pays is not always the party obliged to deduct. Contracts that are silent on the point leave the question to be settled after the fact.

3 · Do the rate and the base agree?

The commonest arithmetic problem is not the rate but the base it is applied to — gross against net, inclusive against exclusive, and the treatment of reimbursements and disbursements inside a single invoice.

4 · Does the certificate flow actually work?

Deduction creates a document the supplier needs. Where certificates are issued late, issued against the wrong entity, or not issued at all, the exposure lands on the relationship before it lands on the return.

5 · Does it reconcile with the return?

The deduction ledger and the return should be reconcilable at any point in the period, not only at the end of it. Where they are not, the difference is the measure of the risk.