Value-added tax (VAT) was introduced in South Africa on 29th September 1991 to replace GST (General Sales Tax) as an indirect system of taxation. It is levied in terms of the Value-Added Tax Act 89 of 1991. The South African Value-Added Tax Act makes allowance for exemptions, exceptions, deductions and adjustments that effectively lower the VAT liability. VAT was imposed in 1991 at a statutory rate of 10%. The rate was then increased to 14% in 1993, and was increased to 15% on the 1st April 2018 and currently remains the same.
How does it work?
As an example; a person (vendor) who carries on a business activity (enterprise) making a turnover (taxable supplies) of R1 000 000 or more in any twelve month period or is likely to exceed R1m in a 12 month period, is obliged to register with the South African Revenue Services as a VAT vendor and submit VAT returns to SARS. As of 1st March 2010 a person who carries on an enterprise making a turnover in excess of R50 000 a year may voluntarily register with SARS as a vendor.
VAT translates as the value that is added to the goods or services. In a basic example – you buy a pencil for R3.00 and sell it for R4.00, you have added value of R1.00. So, to calculate the revenue collected by SARS (which you have to pay to SARS for being a Vat Vendor) – it is the Vat on R1.00. When you buy the pencil – you pay vat on the R3.00 – thus R0.45 and when you sell the pencil for R4.00 you add vat of R0.56. You then pay over the difference to SARS – in this case R0.15. Which is the exact amount of Vat on R1.00 = R0.15.
Business owners are frequently asking how they can trim their VAT bills. The legal implications of withholding important criteria or trying to take short cuts are extremely serious, but with the help of your business tax services expert, you will be able to reduce your bill legally and efficiently.
Before you can begin to cut down on VAT bills, you will need to understand how the VAT process works.
The basic characteristics of VAT are broken down according to the following points:
- VAT applies generally to transactions relating to goods and services.
- VAT is proportional to the price charged for these items.
- VAT is charged at each stage of the production and distribution process.
- Business owners may deduct tax paid during previous stages, however the burden of the tax is on the final consumer.
To reduce VAT costs, items would need to either fall under the exempt categories, or deduct tax that has been paid during previous stages. You will not have to register for VAT unless you make taxable sales that exceed R1 million over 12 consecutive months. This means that smaller businesses may be exempt from VAT.
There are also additional aspects;
Is your business premises also your home?
Do you tax your commercial property?
Does your company deal with overseas customers and export goods and / or services?
PATC (Professional Accountants and Tax Consultants) has years of experience in dealing with all aspects relating to VAT and other taxes. We will be able to find the best ways to save money and streamline the entire VAT process for your company. VAT is only charged on taxable goods and services made by the business. These supplies do not include goods and services such as salaries, private non-business related goods and services; sale of private items or exempt supplies. As a business owner in South Africa, VAT only applies to items sold within the country or on items that are imported into South Africa.
The current standard rate is 15% on most goods and services and imported items, with certain items exempted or charged at a zero rate, such as exports. Imported items are only charged VAT if the importer of the goods and services is not the business owner, or if the items have been imported for private use or fall into the exempt supplies category. Businesses registered for Vat make VAT payments through a range of channels including posting, SARS branches, EFT, debit orders, eFiling or any of the major banks. VAT returns are done by completing the required, (VAT201) form as supplied by SARS.
On registering, vendors will be given a VAT vendor number that needs to be included on all VAT returns and correspondence with SARS. If vendors have not submitted a return in the past five years, or their VAT201 returns for past 12 months reflect a liability of zero, they will have their Vat registration number suspended. VAT returns must be submitted within 25 days of the end of each VAT cycle, or the vendor can face penalties and interest on late compliance. Penalties are 10% of the amount payable while interest is levied at a standard interest charge. Vendors with an annual turnover of less than R 1.5 million must submit VAT returns every four months. However, they may have the choice to stay on the two-monthly return cycle. Vendors will also have to keep all financial records for a period of five years from the date of the last entry in any book.
VAT Tips for Small Businesses
While many small businesses assume that VAT does not apply to them as it would for larger businesses, every business in South Africa that provides goods or services is in fact required to register for VAT. Failure to comply could cause serious problems – something that very few small businesses are able to recover from in the event of fines or other consequences.
To ensure that your VAT is in order, consider the following VAT tips for small businesses:
- All invoices must reflect correct VAT registration numbers for the supplier and receiver of goods and services – this will ensure that all invoices (inter alia) are correct and in order.
- Ensure that your turnover and financial statements match – this is something that SARS checks regularly. If the financial statement figures differ from your turnover per your Vat returns, this indicates a potential problem, and SARS might be forced to ask questions.
- Never inflate your claim – another reason why it is best to have a professional accountant manage your taxes. An inflated input claim could either incorrectly reduce your VAT liability, or result in a refund for an amount far greater than is legally due to you. This is also considered a criminal offence.
- Claim back the VAT paid on bad debts – you have the right to claim back VAT paid on all your debts that have become irrecoverable. You will however first need to write this debt off – speak to your professional accountant to find out how this is done.
- All quotes must include VAT – even if the VAT rate is 0%. You will need to include VAT on every quote that is sent out to your customers and clients.
- Keep documentary proof of zero-rating – if you do not charge VAT, you can still claim for VAT on the items supplied, however you must always keep proof that you are entitled to do so, or otherwise SARS will raise a red flag.
- Make sure SARS meets deadlines – if you do not receive your VAT refund within 21 business days of SARS receiving your VAT201 return, then you can expect SARS to pay you interest at the prescribed rate.
- Charge VAT on your commission – this is known as output tax and must be paid to SARS on your VAT return. You can then issue tax invoices to the companies that are paying you commission.
- Submit returns regardless – even if you calculate that you have no VAT liability and no VAT payment due to SARS, as a registered vendor you must still submit your returns. Your professional accountant can handle your returns on your behalf, allowing you to get everything in order to meet SARS compliancy.
Key Points to Know About VAT
If your business supplies products and services to the public, you will need an accountant to assist you in calculating your VAT that is owed to SARS. Some important points to note about VAT include the following:
- If you run a business you are required by law to include 15% on all required prices. This percentage will be paid to the South African Revenue Service (SARS).
- You are however entitled to claim back any VAT that has been incurred while running your business, this is referred to as input VAT.
- You can calculate the VAT owed to SARS by adding the VAT that you have added to your invoices, and then subtracting the input VAT such as purchases, rent, water, electricity and other costs. The difference in these amounts will then be paid to SARS.
- All businesses that have a 12 month period turnover that exceeds R1 million are obligated to pay register and pay over VAT to SARS.
- Businesses with a turnover below R1 million but greater than R50 000 for a 12 month period may register voluntarily. Those with a turnover below R50 000 over a 12 month period are not required to register for VAT.
- Most VAT returns need to be completed every two months, summarising the VAT that has been collected as well as the input VAT that your business has incurred. The bookkeeping department at PATC (Professional Accountants and Tax Consultants) is able to assist with these calculations along with your other VAT requirements.
Sorting out your personal or business VAT can be a stressful process that takes a great deal of time to complete. If you wish to utilise the experience, expertise and services of qualified tax experts: