From the Auditor General’s Report 4

Auditor General Leigh Trotman
Auditor General Leigh Trotman

A number of special audits were conducted by the Audit Office. These included audits of the Value Added Tax (VAT) Division, Inland Revenue Department, and of staffing in state agencies.

The following is the Auditor General’s special report on the management of the accounts receivable of the Value Added Tax (VAT) Division.

Introduction. On April 1, 2014, the Value Added Tax (VAT) Division was amalgamated with the Land Tax Department, the Inland Revenue Department and the Licensing Authority to form the Barbados Revenue Authority (BRA).

Before this date, the VAT Division was responsible for the collection and administration of the value added tax under the Value Added Tax Act, Cap. 87.

For the last five years, this division experienced increases in accounts receivable. From 2009-2010 to 2013-2014, accounts receivable have been increasing at an average rate of 13 per cent or $48 million annually.

In this regard, the Barbados Audit Office decided to conduct a special audit on the management of the accounts receivable in the VAT Division. The objective of the audit was to assess the effectiveness of the management of the accounts receivable of the Value Added Tax (VAT) Division in Barbados.

At the close of the financial year 2013-2014, the outstanding receivables at the division were $475 million. This amount is made up of taxes, interest and penalties.

Of this amount, $207 million or 43 per cent was interest and penalties. Eighty three per cent of the accounts receivable is owed by corporations, 13 per cent is owed by individuals, and the remaining four per cent is owed by Government departments and statutory boards.

Accounts receivable are an asset, but if not managed well they can become uncollectible, resulting in the reduction of expected benefit. Government agencies have a duty to manage their accounts receivable effectively as part of good financial management, as this will optimize value for the taxpayer.

Main findings. The main findings are as follows:

The division did not have an effective accounts receivable management strategy. The division’s collection efforts have not been effective since the level of accounts receivable has been increasing by an average of $48 million per year for the last five years.

There is a large component of receivables aged five years and over. Fifty-seven per cent of the accounts receivable are aged five years and over; therefore it is likely that a significant portion will be uncollectible. The division needs to recommend to the Cabinet that those debts which are deemed to be uncollectible should be written off. The more aged a receivable is, the less likely it would be collectible.

The division also needs to reassess its position on the provision for bad debts. It is not clear on what basis the provision for bad debts was arrived at.

No follow-up of instalment agreements or garnishments. From a number of accounts sampled, a high percentage of the taxpayers were in default of their agreements to repay. In addition, out of a sample of 50 garnished accounts examined, no payments were

received from third parties for one year or more.

In the above instances, no further action was taken to collect the outstanding amounts.

Non-enforcement of unpaid tax certificates. The VAT Act gives the division the power to seek legal remedies in the collection of outstanding amounts. One such method is the lodgement of an unpaid tax certificate in the law courts. An unpaid tax certificate when filed and registered has the same effect as a judgment of the court, registered in favour of the Crown against the tax debtor for the amount specified on the certificate.

The audit found that the division sought the assistance of the Solicitor General’s Office in the enforcement of these judgments. However, none of the unpaid tax certificates sent to the Solicitor General’s Office were enforced.

No monitoring and review of the accounts receivable process was done by the management of the division. 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.

Conclusion. Establishing an effective accounts receivable operation is necessary to maximize revenue collection. The lack of an effective operation has impacted negatively on the receivables collection
process of the division.

Recommendations. It is recommend that the Barbados Revenue Authority should:

(1) Document its accounts receivable management strategy;

(2) Write off uncollectible receivables;

(3) create and use risk profiles of registrants for determining strategies in pursuing the collection of receivables;

(4) maintain and update operating guidelines and ensure they are consistently followed;

(5) ensure that performance indicators are established to assist in evaluating the performance of the unit responsible for receivables management;

(6) Put systems in place to ensure that collection is timely and that the enforcement tools available are fully utilized; and

(7) ensure that the accounts receivable listing presented to the Audit Office reconciles with a controlled totals and the accounts receivable recorded in Government’s financial statements.

Background. The Value Added Tax Division was primarily responsible for administering the Value Added Tax Act, Cap. 87. This includes the registering of taxable persons, collection of tax due, enforcement of the VAT legislation, carrying out compliance visits to taxpayers, investigating cases of tax evasion, and the formulation of policy on various related issues.

Additionally, the division receives and handles tax returns and processes refunds.

Value Added Tax (VAT) is imposed on the supply of goods and services by a taxable person (registrant) in Barbados and on the importation of goods. The registration requirement is imposed on any person who makes taxable supplies in Barbados, other than a person whose turnover is less than BDS$80,000 annually.

Three rates of VAT are charged. These are:

Standard rate of 17.5 per cent charged on all taxable supplies.

Reduced rate of 7.5 per cent charged on the supply of accommodation in hotels, guest houses and similar accommodation.

Zero rate, which is charged on supplies outlined in Schedule 1 of the VAT Act.

Reason for the audit. The audit was conducted as part of the Caribbean Association of Supreme Audit Institutions’ (CAROSAI) capacity building programme. This programme was set up to conduct cooperative revenue audits of the Inland Revenue Department and Value Added Tax (VAT) Department of each participating country. The participating countries were Bahamas, Barbados, Grenada, Guyana, Jamaica and St  Lucia.

Management of the accounts receivable of the VAT Division was selected as an audit topic because of similar challenges faced across the region in respect of receivables. This included its fast growing rate and the challenges departments were encounteringin its management.

Accounts receivable make up a significant proportion of the Government’s financial assets, with the VAT receivables accounting for 38 per cent of the Government’s total accounts receivable. At March 31, 2014, the accounts receivables recorded by the division was $475 million.

Receivables not promptly collected can have a direct impact on the Government’s cash flow and financial position. Unpaid receivables can also lead to a shortage of available funds and result in Government’s inability to meet some of its commitments from the revenue received from its operations.

Over the last five years, receivables of the VAT Division have increased significantly, averaging 13 per cent or $48 million annually during the period 2009-2010 to 2013-2014. Increases for this five-year period can be seen in Chart 1 below. The figures used in the chart were those reported in the Government’s consolidated financial statements, since a control total of outstanding amounts were not presented by the division.


Accounts receivable are not recognized unless the tax has been assessed, or the taxpayer has reported the amount in a return filed under the act. Different collection techniques are employed to recover the receivables, including letters of demand, garnishments, letters of intent and unpaid tax certificates.

The VAT Act also makes provision for security to be held against payment of the receivables, and for set-off or deduction of amounts due from debtor to the division against amounts owed by Government to the debtor. This report reviews the implementation and effectiveness of these collection techniques.

Audit Objective. The objective of the audit was to determine whether the division was effective and efficient in managing its receivables. It examined:

Whether the division has strategies in place to curtail the growth in accounts receivable;

Whether the enforcement of the receivables collection process is efficient and effective; and Whether the division monitors and reports on its performance activities by management.

Audit scope. This audit focused on the management of receivables by the Value Added

Tax Division for the period April 1, 2013, to March 31, 2014.

Audit methodology. The approach used for this audit included the review of the Value Added Tax Act 87, and internal documents relating to accounts receivable. Interviews were conducted with the Director of VAT and the principal inspector in the Compliance Section of the division.

Good practices in the management of accounts receivable by other government jurisdictions were examined. These included Australia, Canada and Britain.

Increase in accounts receivable. Over the past five years, increases have been recorded in the accounts receivable for the division in the consolidated financial statements. These have increased by $208 million during the period 2009-2010 to 2013-2014. A breakdown of these receivables is shown in Table 1 below.


Accounts receivable are an asset, but if they are not managed well, they can become uncollectable and not generate the income expected. This section examines and assesses the strategies the division has used in the management of its receivables.

Accounts receivable management strategy. The strategy used by the division was found to be deficient, as it had little impact on reducing receivables and the overall levels of accounts receivable have been growing significantly. Governments such as Britain, Australia and New Zealand have implemented accounts receivable management strategy based on the taxpayer’s circumstances and behaviours. Collection processes are then tailored to the circumstances of the taxpayer.

In this regard the following methods should be considered:

Risk profiling. The division has a significant amount of information available on its computer system that would support the development of risk profiles on registrants. The division has not taken full advantage of available data to develop risk profiles of accounts receivable. For example, the division has information on the taxable incomes, industries, return form data and filing history of the taxpayers.

This data should enable the development of risk profiles and facilitate the segmentation of the outstanding debtor population for different collection strategies.

Risk profiling allows for the segmenting of debtors with similar characteristics into groups. Groups may be segmented according to payment history or current balances. The groups are then profiled according to their level of risk of non-payment.

Risk profiling may be used to direct stronger collection efforts to those taxpayers who pose a higher risk for non-collection.

Currently, the division allocates accounts receivable cases based on values. The higher valued cases are assigned to the most senior officers in the compliance section and the lower valued cases are assigned to the most junior officers in the section. Cases are then subject to a similar collection process regardless of the values. This strategy should be reconsidered.

The segmentation of the debtor population based on the risk profiles would not only conform to best practice in the management of accounts receivable, but would also assist in better allocation of cases for individual case management.

Operating guidelines. Operating guidelines are an effective method of ensuring that collection practices are consistently applied according to policy and standards. They assist staff through the collection process, outlining the key steps required for effective recovery of the accounts receivable. Operating guidelines are developed to ensure that all debtors are treated fairly.

The division used an internal document entitled Compliance Procedures Re: Debtors as its operating guidelines for managing accounts receivable. However, these guidelines were not updated since 2009.

Additionally, the operating guidelines did not establish performance objectives and targets for the management of the receivables.

Continued here: Special Audit of VAT Dept receivables.

Also see: From the Auditor General’s Report 1; From the Auditor General’s Report 2; From the Auditor General’s Report 3

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