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 Inland Revenue Department.
Executive summary. Effective April 1, 2014, the Inland Revenue Department was absorbed into the Barbados Revenue Authority (BRA), a statutory entity responsible for the collection of all major types of Government revenue. Although the department was dissolved on April 1, 2014, the findings and related recommendations included in this report will be helpful to the new entity tasked with the collection of Government’s revenue.
Inland Revenue Department’s core purpose was to administer the collection of taxes in a way that encourages voluntary compliance, while at the same time enforcing compliance to maintain equity and public confidence in the fairness of the tax system. The department had a self-assessment tax system whereby resident, individuals and companies were required to calculate their taxable income, tax liability and pay any tax due at specified times. The department was the sole agency responsible for collecting taxes from individuals and corporations under the Income Tax Act, Cap. 73 (hereinafter referred to as the Income Tax Act).
Taxes are the largest source of Government’s income, and the Inland Revenue Department was responsible for collecting BDS $2.1 billion in cash between financial years 2011-2012 and 2013-2014. However, not all revenue due to the department has been collected and, according to the Auditor General’s Report 2014, accounts receivables exceed $250 million during the period under review.
The objective of the audit was to assess the effectiveness of the management of the accounts receivable of the Inland Revenue Department in Barbados. This included determining whether the department had policies, procedures and systems in place to collect the taxes owed, and reliably measure and report on the effectiveness of the collection efforts.
The review covered the financial years 2011-2012 and 2012-2013 with emphasis on the procedures in place with respect to the collection of receivables.
Major findings. There was no documented management strategy for collecting outstanding monies and minimizing the growth in accounts receivable. Such a strategy should include operational guidelines, performance indicators to assess the work of staff of the Compliance Unit, and the profiling of the risk associated with the receivables to determine effort, timing and collection methods to be used for individual taxpayers. These elements were missing.
In addition, the strategy should include policies on training, but the audit revealed that there was minimal training of staff in collection procedures over the audited period.
The department indicated that letters were sent to taxpayers with outstanding balances indicating that “failure to comply with the request to settle arrears would result in the department taking legal action or initiating other compulsory action as required by Section 72 of the Income Tax Act, Cap. 73”. However, there was no evidence that any such action was taken during the period under review.
Hence, there would be no urgency by the taxpayer in the settlement of accounts since the department did not take action to enforce the measures outlined in the letters.
No evidence was provided to indicate that unpaid tax certificates were filed in the courts against those taxpayers who refused to pay, or reneged on any payment plans agreed with the department. Neither was information provided on the number of garnishments enforced by the department.
Furthermore, there was no assessment of the amount of receivables collected, the cost incurred for specific interventions, or how long an action took. Having such information could have assisted in better targeting of taxpayers who were delinquent and generally a better utilization of resources.
The value of the accounts receivable reported in the Government’s Consolidated Financial Statements did not reconcile with the figures in the database of the Inland Revenue Department’s electronic tax system (see Table 2). Therefore, the figures in these accounts could not be relied upon.
This inconsistency will hinder Government from making proper decisions about the collection and reporting of receivables.
These are certificates lodged in the High Court or in the Magistrates’ Court of District “A”, which have the same force and effect as a judgement of the court.
The department in March, 2011, had indicated that the amounts outstanding totalled $252.35 million. There is some uncertainty as to the accuracy of this figure. Personnel indicated that reliance could not be placed on the accounts receivable figures from the computer system.
However, the information provided suggests that the accounts receivable balance had risen substantially every year for the period under review.
It should be noted that the inability of the Audit Office in verifying these balances has impacted on the opinion given on the Government Consolidated Financial statements for financial years 2010-2011 to 2012-2013.
There was also no evidence to show that reports on receivable management had been submitted by the Compliance Unit for review by management. Neither was there any evidence to indicate that there were any reviews of the performance of the unit by management or an independent person. Such reviews could result in weaknesses and errors in the process being identified and corrected in a timely manner.
The high level of receivables outstanding necessitated a comprehensive plan of action for recovery which should have had the approval of management.
Conclusion. Accounts receivable are a significant part of Government’s financial assets. They are normally highly liquid assets which directly impact on Government’s cash flow. To this end, the non-collection of the accounts receivable significantly affected the financial position of the Government.
The overall process for collecting the accounts receivable was ineffective and inefficient, evidenced by the significant rise in the receivables and the age of the outstanding balances. With the establishment of the Barbados
Revenue Authority (the Authority/BRA), it is hoped that these issues will be addressed and the accounts receivable management process greatly enhanced.
Recommendations. It is recommended that the Barbados Revenue Authority ensures that:
(1) An accounts receivable management strategy is developed and implemented for these taxes. This strategy should aligned with the key aspects of the relevant legislation and include the following:
Performance indicators for the Debt Collection Unit;
An ageing analysis policy on receivables;
A risk profiling strategy for pursuing debtors;
Operational guidelines for the staff of the Debt Collection Unit;
Setting of targets and objectives for the Debt Collection Unit;
Operational plans for the year;
A training policy and manuals; and
A communication strategy that ensures that all stakeholders are kept abreast of the accounts receivable management strategy.
(2) Reconciliations are carried out on the accounts receivable balances between the consolidated financial statements and the records of the electronic tax system on a regular basis and in a timely manner.
(3) The accounts receivable collection methods are followed as per the Income Tax Act, Cap. 73.
(4) Action should be taken to have uncollectible amounts written off; and
(5) Policies and procedures should be implemented to monitor and evaluate the work of the receivables collection unit especially the effectiveness and efficiency of the collection process.
Introduction. The Inland Revenue Department, the Value Added Tax Division, the Land Tax Department, the Revenue Section of the Barbados Licensing Authority, and the Excise Section of the Customs & Excise Department have been merged to form the Barbados Revenue Authority. This merger became effective on April 1, 2014, resulting in the dissolution of the Inland Revenue Department.
Notwithstanding this development, the findings and recommendations of this audit would assist the BRA in establishing a strong Debt Collection Unit.
The Inland Revenue Department (the Department/IRD) was under the purview of the Ministry of Finance. The department was the sole agency responsible for collecting corporation taxes, withholding taxes and insurance remittances (monies withheld/deducted from the premium income), Pay as You Earn (PAYE), and tax on bank assets.
The objective of the department was the administration of and collection of revenue under the Income Tax Act, Cap. 73. The department has stated that its core purpose was to ensure that everyone understands and receives what they are entitled to and pays what they owe, so that all are contributing to the needs of Barbados. The Department had a selfassessment tax system whereby resident individuals and companies were
required to calculate their taxable income and tax liability as well as pay the tax due at specified times.
The department was managed by a commissioner who oversaw its daily operations. The Compliance Unit was dedicated to collecting all accounts receivable. It comprised of 17 persons and was divided into four sections. The sections were responsible for Corporation Tax Returns, Pay As You Earn (PAYE) Employers Account, Individual Income Tax, and Tax Roll respectively.
Reason for the audit.
It was also observed that substantial amounts were owed to the Inland Revenue Department for a prolonged period of time; hence the review was conducted to determine how effective the department was in managing its debt. Also, the Government’s Consolidated Financial Statement was given a qualified opinion because of the inability of the Audit Office to verify the accounts receivables due to the lack of supporting documentation.
At the Ix Congress Of The Caribbean Association Of Supreme Audit
Institutions (CAROSAI) held from March 18 to 21, 2013, in Trinidad and
Tobago, members agreed to conduct cooperative audits of the major revenue collecting agencies in the Caribbean. This is part of CAROSAI’s capacity building programme where auditors meet to share strategies and approaches on a common topic.
Six countries are participating; namely, Bahamas, Barbados, Grenada, Guyana, Jamaica, and St Lucia.
Large amounts outstanding. Accounts receivable, in relation to the Inland Revenue Department, is an accounting term used to describe taxes owed to the Government by taxpayers. They account for a major proportion of the Government’s financial assets at any point in time, with the receivables of the Department accounting for 18 per cent of the Government’s total financial assets. They are broken down into taxes, penalties and interest.
Accounts receivable have a direct impact on the Government’s cash flow and financial position. This means that unpaid accounts receivable can lead to cash shortages, resulting in Government’s inability to meet commitments from the revenue received from operations.
Continued here: Non-collection one big issue.
Also see: From the Auditor General’s Report 1; From the Auditor General’s Report 2; From the Auditor General’s Report 3; From the Auditor General’s Report 4