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“The Hidden Trap in VAT Input Apportionment”

Under the Value Added Tax Act, Cap 349 (Uganda), a taxpayer can claim input tax (VAT paid on purchases/imports) only to the extent that it is attributable to taxable supplies (standard-rated or zero-rated). When a business deals in both taxable and exempt supplies, it must apportion input tax between the two categories.

📍 Apportionment is necessary for VAT-registered individuals involved in both exempt and taxable supplies. For instance, consider a petrol station selling fuel (exempt) and lubricants (taxable). If the station purchases software with VAT input, it cannot claim the full input as the software supports both fuel and lubricant sales.

📍 The business can only claim a portion of the VAT input using the formula A*B/C, where A is the input incurred, B is the taxable supplies, and C is the total supplies (including exempt supplies). If B/C is greater than 95%, the business claims all VAT input; if B/C is less than 95%, no claim is made.

📍 Upon VAT registration, taxpayers are given a default method for apportioning VAT input. If the default method poses a disadvantage, taxpayers can request to use the Standard Alternative Method (SAM) of apportionment.

📍 SAM allows claiming VAT input directly related to taxable supplies (e.g., lubricants) and apportions input on other purchases not directly linked to taxable supplies using the formula mentioned earlier.

It's essential to note:
📌 URA may request adjustments if the provisional method differs significantly from actual annual figures.
📌 Businesses with wholly exempt supplies cannot register for VAT or claim input tax.
📌 Detailed apportionment records are crucial for URA audits.

For further insights on navigating VAT complexities, connect with the Demo Consult team.