Irrecoverable VAT

Typically, when a business supplies goods and services, the VAT charged will be offset against the VAT it has incurred on purchases used to run the business (input VAT). Where the supplies of a company are exempt from VAT, as is often the case for banks, VAT is not charged to customers and the company cannot recover its input VAT. This irrecoverable VAT is paid by the banks to the government.

Such irrecoverable VAT rose from 10.5% to 14.1% of total taxes borne in 2017 and 2018 respectively for the study participants. The increase in irrecoverable VAT over the period 2017 to 2018, is most likely due to increased spending by banks on technology infrastructure which grew by 4% over the period. Spending on technology infrastructure increases the banks’ cost base and level of irrecoverable input VAT as there is no corresponding increase in output VAT to offset the input VAT against.

The irrecoverable VAT cost that accompanies adoption of technology can be viewed as a tax measure that disincentivises digitalisation in sectors like banking whose income is largely VAT exempt compared to sectors where income is VATable as the VATable sectors are able offset VAT incurred on technology against their output VAT.