VAT is coming. Does anyone know exactly what that means? I do!
I have owned companies in the UK that were VAT registered and I know how it works and let me tell you it is a tax that is designed so that only the end user ie you and me pay it.
It all falls on the little guy. Sure all the companies pay it but they can claim it back. Here is how it works:
A company sells one tonne of aluminium to another for say BD1,000. The receiver will pay an extra five per cent VAT which is BD50 which the seller sends to the government.
The second firm rolls the aluminium into sheets and sells a tonne to a workshop for BD2,000. On top of that they will charge BD100 VAT. They will then deduct the BD50 they originally paid and send the other BD50 to the government.
The workshop makes cargo boxes and sells them to customers for the equivalent of BD4,000 a tonne on which they charge BD200 VAT. They then deduct the BD100 they paid the buyer and send the other BD100 to the government. So the government gets BD200, all of which is paid by the end user.
Businesses have to keep track of all the VAT they are charged, which is why they need to have receipts which show the charging companies’ VAT number.
They also need to put their VAT number on all of their invoices on which they are charging VAT.
Then their accountants can count up all the VAT they charged and deduct from that all the VAT they paid and then they pay the difference to the government.
The potential for large-scale fraud is immense.
I know a dozen different ways simply by reading court reports in the UK.
There are thousands of small- to medium-sized enterprises in Bahrain that have no experience or culture of paying taxes to the government.
Many of these will just use up all the money paid to them including the VAT, and when the VAT man comes calling they will not have the money to pay the bills.
This will result in a court action and potential winding up order or will it be jail?
This is not going to go well.
And we have now about 10 weeks.
That is 10 weeks for all businesses in Bahrain to change their accounting systems and practices. That is 10 weeks to train all accounts staff to process VAT, 10 weeks to get all new invoice and receipt stationary printed with the VAT number on it, and that is always assuming that the government has got a VAT department up and running which is registering companies and issuing them with a VAT number.
To put this in perspective Saudi Arabia and the UAE announced VAT over one year in advance, giving 12 whole months to get ready, trained and printed and they still have many teething problems.
Good luck Bahrain, you are going to need it.