Special audit of VAT Dept receivables
Continued from: From the Auditor General’s Report 4.
Effectiveness of collection methods. The division did not collect information on its tax collection methods and so cannot reliably determine the effectiveness of the different collection methods. The following was observed in respect of the collection process:
All taxpayers with outstanding amounts did not receive demand letters, that is, request for payment. For example, taxpayers who were in default for three months or less did not receive demand letters.
Some debtors received multiple demand letters, but no further follow-up collection action was taken. Of the 460 demand letters issued for the year 2013-2014, 77 of the debtors were issued multiple demand letters, but no further collection action was taken on these accounts, even though the taxpayers did not clear the outstanding receivable.
The techniques used by the division to collect receivables were not applied in a timely manner. For example, garnishments to third parties were sent six months or more after the demand letters were issued to the debtor.
Demand letters call for immediate payment, and therefore the next stage of collection should be performed soon after the demand notice is issued when payment has not been received.
Taxpayers who have instalment agreements have not always been monitored to ensure that they are complying with the terms of the instalment agreement. The system does not automatically alert the officer that the taxpayer is in default of their instalment agreement. In addition, instalment agreements are not always recorded on the taxpayer’s account in the VETAS system. This factor has implications for timely follow-up action being taken.
A number of registrants defaulted on their instalment agreements but there was no evidence of any followed-up action being taken. These registrants should have been issued with letters of intent. This letter of intent is similar to the demand letter, but gives the tax payer 14 days to visit the VAT Division to have the account rectified beforen further action is taken.
Where taxpayers could not be located, there was no indication that an effort was made to obtain information on their whereabouts through third party information obtained from other Government departments.
Performance indicators. Performance Indicators are quantitative and qualitative measures used to review an organization’s progress against its goals. These are broken down and set as targets for achievements by departments and individuals. The achievement of these targets should be reviewed at regular intervals.
The division had identified performance indicators for refunds process but did not identify performance indicators for the accounts receivable process.
The lack of performance indicators limited the division’s ability in determining the effectiveness of the receivables collection approach and performance. It also limited the division in comparing its performance against its historical trends.
Training. It was observed that the division does not have a training policy and has not conducted any formal training programmes for staff involved in the management of accounts receivable. Staff obtained training knowledge through reading the operating guidelines (Compliance Procedures Re: Debtors), on-the-job training and information passed on by other officers in the section.
A training policy ensures that employees are properly trained in the skills they need to carry out their jobs. Accounts receivable activities require a broad range of knowledge and skills and therefore training of staff is critical for management to maximize its collections efforts.
Bad debt policy and procedures.
While the division seeks to reduce accounts receivable by collecting revenue that is due, there is also a need to write off certain debts that cannot be collected. This would allow for them to be fairly and accurately presented. Large amounts of delinquent debt reported as receivables are misleading because the more aged a receivables is, the less likely it would be collectible.
The division has a significant amount of accounts receivable that are aged. The aging schedule shows that approximately $265 million (57 per cent) of the $475 million in accounts receivable as at March 31, 2014, have been delinquent for five years or more (Chart 2). The older debt can be more difficult to collect because of the difficulties in locating the debtor and their lower propensity to pay.
Other governments in adopting best practices of managing accounts receivable have not only developed bad debt policies, but have written off bad debts. According to the OECD, governments have written off accounts receivable that were deemed to be uncollectible, accounts receivable that were irrecoverable by law (bankruptcy or wind-up), and accounts receivable that were uneconomical to pursue.
Similar criteria could have also been used in writing off bad debt by the division.
In addition, the receivables include taxpayers who have not filed for five years or more, and taxpayers who have filed for bankruptcy or have ceased operations. These are indicators that the funds owed by these taxpayers may be uncollectible and should be considered for write-off.
Recommendations. The Barbados Revenue Authority should create and document an accounts receivable strategy or policy in accordance with industry best practices and performance metrics. This strategy should establish:
Policies or guidance on uncollectible debts;
Risk profiles for the management of accounts receivable;
Updated operating guidelines which should be consistently followed;
Performance indicators relevant to debt recovery; and training programmes for staff involved in the management of receivables.
Enforcement methods. Enforcement involves taking the appropriate action to collect accounts receivable and ensuring prompt collection of payments. For enforcement to be effective this requires:
Adequate staff to meet the requirements of the accounts receivable management activities; and
Required skills and experience to enforce the accounts receivable management policy
The division did not have adequate staff to perform the accounts receivable activities. The staff complement of ten persons was inadequate to pursue 6,513 registrants who are delinquent, especially where the staff is involved in other activities not related to receivables collection. The division indicated that it has experienced staff shortages throughout the years and as a result was unable to adequately pursue the collection of the accounts receivables.
Audit inquiries revealed that cases relating to accounts receivable were frequently reassigned, resulting in a number of incomplete or untouched cases. The division indicated that this was due to staff shortages and staff being reassigned within other sections of the division or to other Government departments.
Such action hinders the collection process.
Operating guidelines and the Value Added Tax Act. The range of options that can be taken for the collection of accounts receivable are stated in the VAT Act and include the following:
(2) Issuing of unpaid tax certificates –– the unpaid tax certificate is a document filed in the High Court or the Magistrates’ Court for District A. When filed and registered, it has the same effect as a judgment of the court in favour of the Crown against the tax debtor or the amount specified in the certificate.
(2) Set-off or deduction –– where the division can deduct the tax owed by the debtor from any amount that is payable to the debtor by the Crown.
(3) Garnishments –– demand for payment from a third party to pay the division monies owed by a registrant.
(4) A notice for immediate payment –– where the Comptroller suspects that the debtor is about to leave the island, or in any other circumstances considers it appropriate for the protection of the revenue to do so.
The act also allows the Comptroller to accept security in any amount or form that is satisfactory for payment of any amount that is due by the debtor. The security that can be accepted is at the discretion of the Comptroller as it is not specified in the act.
The division’s operating guidelines also known as the Compliance
Procedures Re: Debtors includes the unpaid tax certificates and garnishments in its operating procedures. It does not incorporate set-off or include the holding of security that may be held for payment of accounts receivable.
Enforcement of the collection procedures. The division uses demand notices, letters of intent and unpaid tax certificates to enforce the collection of accounts receivable. The demand letter states that failure to pay the outstanding amounts immediately would lead to legal action being taken against the debtor. However, no evidence was found indicating that legal action was taken against the debtors for immediate non-payment.
Fifty accounts were reviewed and 80 per cent of the accounts showed that no collection action was pursued after the demand letter was sent.
The letter of intent also calls for immediate payment of the debt, but it gives the taxpayer 14 days to make a proposal for settling the outstanding amounts. It also states that failure to comply with the notice will result in legal proceedings being brought against the taxpayer to recover the outstanding amounts.
Of the accounts sampled there were no cases found where legal proceedings were brought against any taxpayer for failure to comply with the letter of intent.
The operating guidelines require that when there is no positive response from the taxpayer to settle the outstanding amounts after the letter of intent has been issued, an unpaid tax certificate is to be issued. Of the 15 letters of intent which were issued for the review period, one third of the taxpayers were issued with an unpaid tax certificate.
No further collection action was taken in respect of the other two thirds after the issuance of the letter
The Comptroller of Customs was given the power under the VAT Act, Cap. 87 to enforce the unpaid tax certificates as though it was a judgment of the court. However, investigations revealed that the division had sent the relevant files to the Solicitor General’s Chambers for enforcement.
None of these unpaid tax certificates issued by the Division was enforced.
6.47 There was no evidence that the unit charged with the management of the accounts receivable function, was monitored or evaluated periodically.
This information would assist management in improving its collection strategies.
The Barbados Revenue Authority should:
(1) Set up a separate unit mandated to carry out the various accounts receivable activities;
(2) Ensure that the policies and processes for collecting the accounts receivable are enforced;
(3) Include in their activity reports the following:
(a) information about the number and aging of the receivables the authority has to manage;
(b) information on any cases resolved;
(c) information on all collection processes and the total amounts collected for each process;
(d) the number of new cases of accounts receivable;
(e) put systems in place to monitor and review the accounts receivable process on a regular basis.
To be continued.