The BC Government claims that the introduction of HST will lower compliance costs because businesses no longer have to collect, remit and account for two separate taxes. However, the compliance burden related to GST for large businesses will actually likely increase with HST, even though they no longer have to account for PST.
This is because “large” businesses, as defined in the HST rules, have to comply with the Input Tax Credit recapture rules. Essentially, the provincial portion (7%) of ITCs cannot be claimed for:
- Energy (except where purchased by farms or used to produce goods for resale)
- Road vehicles weighing less than 3,000 Kg and parts and some services for them
- Food, beverages and entertainment.
For the first 5 years, 100% of the ITCs for these items are recaptured, that is, cannot be claimed. After 5 years, 75% cannot be claimed, with the percentage reducing by 25% per year for the next 3 years, when by July 1, 2018 the recapture will be phased out.
This will require considerably more bookkeeping to keep track of the Input Tax Credits subject to recapture, which must be reported separately on the HST return. Businesses can’t simply decide to not claim the ITCs, they have to report them on the HST return, or be potentially subject to penalty and interest. No doubt accounting software will eventually be updated to allow for tracking and reporting of recaptured ITCs, but until then, bookkeepers and accountants will have to track them manually, which take extra time and effort.
There are “simplified” methods available, where a certain percentage of energy expenditures are used as a proxy for actually tracking the exact ITC and usage of the energy or other expense, but they are actually not that simple.
Large businesses are basically any business with taxable supplies (sales) of more than $10,000,000 per year. This might seem irrelevant to most businesses in your industry, but there is catch. The $10,000,000 threshold applies to associated groups of businesses. This means that if two or more businesses are associated, they may exceed the threshold.
Businesses are associated if they are owned by the same person or group of persons, and may be associated if any related person or group of persons owns shares in the business, including partnerships and joint ventures. Whether or not two businesses are associated for HST purposes is very complicated, and you should seek your accountant’s help to make a proper determination.