By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian businesses yesterday expressed fears that Value-Added Tax (VAT) will cause “a cash flow nightmare”, warning that they would have to use “profits and working capital” to cover tax payments on sales they never receive.

Steven D’Alewyn, Cavalier Construction’s chief financial officer, told Tribune Business that the ‘retention’ aspect of construction contracts was “really concerning me the most” with VAT’s implementation just over eight months away.

Explaining how VAT could impact Cavalier and other Bahamian contractors, Mr D’Alewyn used the example of a $5 million home construction project, where the client was invoiced for a series of $1 million payments every quarter.

With five billings in all, Mr D’Alewyn explained that with each one, the client ‘retained’ 10 per cent of the construction price as a means of protection against any defects or liabilities that the contractor had to cover.

This sum was not paid over to the contractor, but it still had to charge 15 per cent VAT on the full $1 million amount - making for a total bill of $1.15 million each quarter.

“You don’t pay me the retention but I have to pay VAT on it,” Mr D’Alewyn said, explaining that the contractor would have to cover (pay themselves) the 15 per cent levy on the ‘retention’ not paid by clients.

Noting that VAT became payable at the time of billing (when the invoice was sent), Mr D’Alewyn said the new tax would likely impact cash flow for an industry where profit margins were already thin.

“[The client] is going to retain a portion of the price for 12 months after completion for liabilities, defects,” he told Tribune Business. “I could be carrying the VAT on the retention for a long period of time.

“If I get into a dispute with someone over a receivable, I may be carrying that for a long time, especially if I go through a long, protracted court case. Some people could be sitting there and financing that forever.

“It’s a major cash flow issue, and that’s the thing people are not really focusing in on. If you work on a price system of billing and collect, and bill for $1.15 million, you receive the $900,000 and the rest you have to wait for.

“I’m not entirely sure how it’s going to pan out, but I can see a portion of the VAT on the retention that we’re going to have to finance. I don’t think there’s any way of getting around that.”

“It could be a cash flow nightmare for a lot of people,” Mr D’Alewyn told Tribune Business of VAT. “Finding the funds to pay VAT on retentions up front, it uses up profit and working capital.

“I’m not quite sure people are prepared for that. Businesses are going to have to invest in systems to deal with that. If you’re a collections agent for the Government, and have to finance VAT on sales that are not collected from the customer, that could be a major problem.”

John Rolle, the Ministry of Finance’s financial secretary, yesterday confirmed to a Bahamas Chamber of Commerce and Employers Confederation (BCCEC) luncheon that the private sector would be liable to pay VAT to the Government as soon as invoices were issued.

“It’s the time of supply. Your VAT liability occurs when you provide the billing,” Mr Rolle said, confirming Mr D’Alewyn’s worst fears by stating that contracts where staged payments were involved were liable to pay VAT at every stage.

Mr D’Alewyn, meanwhile, warned that retailers sitting on inventory for six months or more would experience similar issues, as they might have to finance the VAT on that stock until it sold.

He likened the situation with VAT to Business Licences, and how the method for calculating the latter changed from a ‘cash receipt’ basis - where firms never got charged for bad debts - to a turnover system, where uncollected sales were included in the calculation.

“You paid your Business Licence and never collected a penny,” Mr D’Alewyn said.

“You had to finance the Business Licence on those sales. The same thing will happen with VAT to the extent people have uncollected debts. There’s no relief anywhere for businesses that suffer bad debts, either with Business Licence or VAT.”

Mr Rolle, though, said there were plans for Bahamian companies who registered to pay VAT to “write off bad debts and receivables”, although no details were provided and he left the issue open to discussion.

He was responding to a question from Andrew O’Brien, an attorney and partner with Glinton, Sweeting & O’Brien, who had said “it makes most sense” for businesses to remit VAT to the Government in the month after the sales proceeds were collected.

And Mr Rolle’s fellow presenter at the BCCEC conference, Wayne Lovell, KPMG Barbados’ senior tax director, also warned the private sector that VAT could damage their cash flow.

Once sales were billed/invoiced, Mr Lovell said companies were liable to pay the due VAT to the Government by the 21st of the following month.

“This is important because it could affect your cash flow,” Mr Lovell warned. “Sometimes, if you don’t collect sales for two-three months, you may find yourself running an overdraft or paying VAT on sales not collected.

“VAT can affect your cash flow, especially if you have inter-company accounts, rent from another company and provide management services. These things usually attract VAT. You have to look at cash flow.”

Mr Lovell said Bahamian companies needed to review the credit terms they offered customers to ensure prompt payment.

He also urged firms to set up a system where they had ‘VAT payables’, ‘VAT receivables’ and ‘VAT clearing’ accounts, so that they could track what was paid on their inputs and sales, and remit the net difference to the Government.

And Mr Lovell also called on the Bahamian private sector to ensure that more than one worker was responsible for dealing with VAT, to avoid missing filing deadline and being subject to penalties when one was sick or on holiday.