VALUE ADDED TAX. WHAT IS IT?

 

VAT is an indirect tax on the consumption of goods and services in the economy. Revenue is raised for government by requiring certain businesses to register and to charge VAT on the taxable supplies of goods and services.

VAT is charged at each stage of the production and distribution process and it is proportional to the price charged for the goods and services.

VAT is presently levied at the standard rate of 15% on the supply of most goods and services and on the importation of goods. The VAT on the importation of goods is collected by customs. There is a limited range of goods and services which are subject to VAT at the zero rate or are exempt from VAT.

 

WHO SHOULD REGISTER AS A VAT VENDOR?

Compulsory VAT registration if your business is likely to exceed R1Mil income in any consecutive 12-month period.

Voluntary VAT registration if your income exceeded R50 000 in the past 12-month period.

 

WHEN SHOULD YOU SUBMIT RETURNS & MAKE PAYMENTS?

If you use eFiling then you have to submit and pay on or before the last day of the month.

If you are going to do a bank deposit or an EFT, then you have to submit and pay on or before the 25th of that month.

 

OUTPUT VAT VS. INPUT VAT

Input VAT = the VAT on the things that you buy (coming in to your business)

Output VAT = the VAT you charge on your items (going out of your business)

 

VAT CALCULATION

Output VAT less Input VAT = VAT amount to be paid/ due to you

 

PENALTIES & INTEREST

Late payments attract penalties & interest.

The Penalty = 10% and is a once off charge.

Interest is payable on the capital portion at the stipulated SARS interest rate and is compounded monthly.

The current SARS interest rate = 10.25%

 

STANDARD, ZERO-RATED & EXEMPT

For VAT purposes all supplies are treated as either being Standard rated, Zero-rated or Exempt.

Standard rated supplies are subject to VAT at the prescribed rate of 14%. Vendors making standard rated supplies are required to levy output tax at the prescribed rate on the value of the supply which must then be paid over to SARS. Such vendors may claim input tax deductions on goods or services acquired in the course of making such taxable supplies.

A zero-rated supply is a taxable supply on which VAT is levied at a rate of 0%. Therefore, no output tax will be payable to SARS but vendors making zero-rated supplies are entitled to claim their input tax deductions on goods and services acquired in the course of making the zero-rated taxable supplies.

An exempt supply is not a taxable supply. Neither VAT at the standard rate or zero-rate is chargeable. Vendors may not claim an input tax deduction in respect of goods or service acquired in the course of making exempt supplies. Such a vendor would not register as a VAT vendor.

Vendors making mixed supplies (taxable & exempt) are required to apportion their input deduction accordingly.

 

ZERO-RATED VAT ITEMS

1. Direct exports (they will be subject to tax in another country)
2. The supply of goods to a branch or main business in an export country
3. 19 basic food items (Brown bread, maize meal, samp, mealie rice, dried mealies, dried beans, lentils, pilchards/sardinella in tins, milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs, edible legumes & pulses of leguminous plants.)
4. Petrol or diesel (items subject to the fuel levy)
5. The supply of paraffin
6. The supply of certain goods for farming purposes
7. Disposing of an enterprise or part of it as a going concern
8. The sale of gold to the SA Reserve Bank, SA Mint and other registered banks
9. The supply of gold coins by the SA Mint, but not gold coins set into jewellery
10. Supplies to the Industrial Development Zones (where the direct export rules apply) (Coega, East London & Dube)
11. Conversion of old order mineral rights (mining)
12. Income of foreign donor-funded projects
13. Supply of goods by a vendor to a non-resident where that vendor delivers the goods outside of South Africa
14. Compensation received from a public authority in terms of Section 19 of the Animal Diseases Act, 1984 to supply a ‘controlled animal or thing.’
15. Land reform and land restitution transactions
16. Goods sold from a Duty Free Shop

 

EXEMPT VAT ITEMS

1. Interest
2. Non-fee related financial services (life insurance, medical schemes etc.)
3. Educational services provided by an approved educational institution (including after-care & crèche facilities)
4. Residential rental accommodation
5. Public road and rail transport
6. Supply by a charitable organisation of any donated goods
7. The sale or rental of land outside SA
8. Share block and body corporate levies but not homeowner’s associations
9. Union membership fees
10. Letting of leasehold land, where the land will be used for erecting dwellings

 

ACCOUNTING BASIS

There are 2 ways of accounting for VAT. Accrual or Cash(Payments) basis.

Vendors are required to account for VAT on an Invoice Basis (Accrual Basis). This means that when you issue or receive an invoice is when you must account for it NOT when you receive the payment or make the payment.

The Cash basis is only available to:

• Vendors who are natural persons (or partnerships consisting only of natural persons) whose total taxable supplies at the end of a tax period have not exceeded R2.5 million in the previous 12 months, and are not likely to exceed R2.5 million in the next 12 months;
• Public authorities, water boards; regional electricity distributors; certain municipal entities; municipalities, associations not for gain and welfare organisations – regardless of the value of taxable supplies.
• Juristic persons such as companies and trusts do not qualify for the payments basis

 

RECORDKEEPING FOR VAT

The VAT Act does not contain a comprehensive list relating to all vendors, as this would be impractical. You should, however, maintain all reasonable accounting documents and records to enable SARS auditors to establish the nature, time and value of all taxable supplies and importation of goods and services. This includes information which assists in reconciling your accounting records with the VAT returns submitted for at least the past five years. Details of any exempt supplies, other non-taxable activities, adjustments and any method of apportionment used should also be available.

 

TAX INVOICES

The following requirements must be reflected on a tax invoice (and credit note) in order for it to be considered:

The words “TAX INVOICE” in a prominent place

Name, address & VAT registration number of the supplier

Name, address & VAT registration number of the recipient

Invoice number and date of issue

Full and proper description of goods and/or services

Quantity or volume of goods or services supplied

Price & VAT according to one of the 3 methods below

 

Method 1

Price excl VAT = R500

VAT charged = R75

Total incl VAT = R575

 

Method 2

Total consideration = R575

VAT included at 15%

 

Method 3

Total consideration = R575

VAT included R75

 

ITEMS YOU CANNOT CLAIM VAT ON

Car purchase or hire (unless it is a bakkie)

Entertainment

Municipal rates

Rentals

Transport by road or rail

Petrol & diesel expenses

Salaries & wages

Supplies more than R50 that you can’t substantiate with a tax invoice

Insurance premiums (life insurance)

Donations received

Change in use of supplied goods or services (buying it for the company then taking it for yourself)

Office refreshments (tea, coffee & snacks)

 

**If SARS finds out that you’ve claimed where you shouldn’t have, it will reverse the deduction and penalise you 10% and a monthly interest. Plus, SARS will slap you with understatement penalties of between 5 and 200% (Tax Administration Act.)

 

**Keep in mind that SARS won’t forget that you’ve claimed incorrectly and it may flag you for regular audits.

 

ITEMS YOU CAN CLAIM VAT ON

Business travel where you or your employees have to spend more than 1 night away from home or business

Employees personal subsistence (you can claim VAT on your employees’ meals, refreshments & accommodation if they spend more than 1 night away from home or their usual place of work)

Domestic airfares

Parking

Internet costs

Short term insurance

Insurance for car rentals

Tollgates

Moving and relocating costs (for an employee and his/her family)

Royalties (Royalties you pay)

Medical expenses (for your employees if you pay the bill)

Flowers (for employees if they are sick, having a child or their loved one’s have passed away)

Flowers for reception and plants for the office

Artwork for the office (has to be in the office)

Training seminars

Training refreshments for delegates

Speakers doing presentations to customers on topics for your business

Promotional gifts (pens, desk pads, calendars, t-shirts, umbrellas etc. – must have a company logo on to qualify)

Subscriptions & memberships (for you and your employees)

Repairs, services and improvements to vehicles (improvements being gear lock, window tinting etc.)

** Remember to keep your receipts for everything you put through the books

 

THE IMPLICATIONS OF DE-REGISTERING FOR VAT

If a company’s turnover falls below the current VAT threshold of R1 Million, if a company is closed or the company has stopped trading in South Africa, the company has the option of de-registering for VAT. Careful consideration should be given to de-registering for VAT as there could be consequences if it is not planned correctly.

When a business de-registers for VAT, it is deemed to dispose of all assets held and certain rights attached to the business immediately before deregistration.

So the assets (property, vehicles, equipment etc.) are valued (at the lessor amount of either at cost or in the open market by an independent valuation) and the deemed VAT on these assets needs to be paid to SARS. Add up all your assets and this could amount to a substantial amount that could create cash flow problems.

VAT also has to be accounted for on the amount of any outstanding trade creditors on the date of deregistration (where input tax has been claimed.)

Some relief will be granted if a company decides to deregister due to not meeting the threshold. The VAT liability can be paid over a period of 6 months and no interest will be payable on the outstanding amount during this period.

Careful planning needs to be done before a vendor decides to deregister for VAT. Trade creditors should be settled before deregistration. Asset that will incur a VAT liability should be quantified beforehand to assess any cash flow implications.

 

PREPARATION FOR A VAT AUDIT

What is an audit? An audit is generally a detailed check on the correctness of VAT returns and payments submitted by you.

No company is immune to a VAT audit. SARS may find something on your VAT return that does not appear to be right and you could face an audit or you could be randomly selected for an audit.

The VAT auditor will arrange a meeting at your principal place of business to check your VAT records or they could call you to upload relevant documentation via eFiling. You have 21 business days to supply the correct documents SARS requested.

Make sure you put the correct contact information in your VAT return and don’t ignore any correspondence you receive from SARS whether by sms or email. If it appears to be suspicious then call the SARS contact centre.

The number of tax periods to be audited will be selected on a sample basis and will not necessarily include the latest return submitted. If material deficiencies and discrepancies arise from the selected sample, the scope of the audit may be extended to include other tax periods.

 

** SARS can go as far back as 10 years!

 

If faced with a full VAT audit, make sure you have the following documentation ready:

Your VAT return totals

Your VAT Control account

Your tax invoices (these must be valid)

Records of previous VAT audits (if applicable)

VAT refunds

Assets and Liabilities (will be checked for Capital Gains Tax)

SARS will also check the following things:

How you’ve classified your trade

Your type of taxable supplies

Any VAT interest and penalties incurred

If you are meticulous with your invoices and accounting records, then you have nothing to fear.

 

SARS Contact Centre 0800 00 7277