VALUE ADDED TAX (VAT) 101
VAT is a topic that gives small business owners a headache and its one of the areas we seem to get a lot of questions from our community about, even the ones who have been registered for many years. The first word of advice we give to entrepreneurs who are VAT vendors or want to register for VAT is that they must view VAT for what it is. VAT charged by your business is NOT part of your cash flows. It does not belong to the business, it is money that belongs to SARS, and your business is merely a third party collecting on behalf of SARS. The business must, therefore, adopt a debt collector’s mentality and discipline. When you are collecting money on behalf of a third party, you never treat that money as yours. This means that the business must have a clearly defined process that guides the collection of VAT.
What is VAT?
Our tax laws have various tax types that citizens (individuals, businesses, and NGOs) must adhere to, one of those is VAT. It is an indirect tax, which means that it is a tax that is not deducted from income but charged on the value of goods and services that you supply. The VAT rate is currently 15% (amended on 1 April 2018).
It is compulsory for any business to register for VAT if the income earned in any consecutive twelve-month period exceeded or is likely to exceed R1 million. However, any business may choose to register voluntarily if the income earned in the past twelve-month period exceeded R50 000.
Once you are registered, you are referred to as a VAT vendor.
TIP: If you are not sure if you should be registered or not, it is best to do a 12-month forecast of your business, and if your total revenue for the period is above R1million, then you can register the business for VAT.
How does VAT work?
The VAT system is not as complicated as it may seem.
- You buy your goods from your suppliers or use services from a provider. The price will include VAT. (This is charged whether you are registered for VAT or not).
- You sell these goods to your customer or render services to your clients, charging VAT on the goods or services. (This is only charged if you are VAT registered).
- Once registered for VAT, the difference between the VAT you paid when purchasing and the VAT you have collected in your business, will either paid to or claimed from SARS according to the VAT cycles (usually every 2 months or monthly).
Advantages of being a VAT vendor
The most significant advantage of being registered as a VAT vendor is the reduced cost on all goods or services purchased by or rendered to the business provided that these goods/services are used to make taxable supplies.
By claiming VAT, it essentially means that the business reduces the cost of goods purchased or services rendered by claiming the input tax back from SARS. If you are not VAT registered, you are not able to claim VAT and this VAT portion just form part of your regular expenses.
Having mentioned the above, there is often a misconception that a business can make money lots of money from VAT. That is a myth. Remember you only claim VAT on what you have been charged VAT on, which in most cases it is below what you have charged on your goods and services anyway. If a “healthy” business is constantly collecting VAT refunds, then its probably not that healthy and most likely a loss-making business and it should be focusing on a turnaround strategy.
Disadvantages of being a VAT vendor
Once registered as a VAT vendor, you have no choice but to charge an additional 15% on your goods or services. It is not an option (farming rules excluded). This makes your products or service look expensive to your customers or clients if they are not vendors themselves.
Apart from that, the administration of VAT is not that simple. Businesses need to hire a bookkeeper or outsource accounting services to make sure that their accounting and administration is adequate to meet all SARS requirements.
Dealing with VAT in your business
As a business essentially, you need to register as soon as you qualify to register for VAT, File your VAT returns and make payments or claim your refund according to your VAT cycle.
For most entrepreneurs, complications and headaches start when its time to determine what needs to be declared and paid over to SARS. This is when the debt collector’s mentality needs to kick in. Always have this view, you were trusted with VAT collection by SARS, and in turn, you were allowed to reduce this collected amount by the vatable expenses you incurred in the business. Every VAT cycle you are then required to pay over to SARS what is owed to them or if lucky claim a refund. Simple as that.
TIP 1: Most VAT vendors pay VAT to SARS at 2-month intervals or monthly (where turnover is above R30million). As a VAT vendor, open a separate interest-bearing account (money market, notice account, etc) and on a regular basis (weekly if possible), transfer VAT from the income you have received already to that account. Keep it there until its due for payment to SARS. This will not only earn you some interest, but it will make sure that you separate SARS’s money from your regular cash in the business. (smart.…right?)
TIP 2: It makes sense to do business with businesses that are VAT registered if you are also VAT registered. That way you minimise the VAT you are paying over to SARS. So when selecting who you do business with always have that in mind. Of course, this is not compulsory.
TIP 3: There is no way to stress this enough, but get on top of your administration. Always keep receipts and invoices. Make sure that your invoices meet SARS requirements. There are so many cloud-based solutions to make this a seamless exercise.
TIP 4: Most VAT refunds are audited by SARS, particularly large amounts. Do not claim a refund unless you have supporting documents for your refund that are compliant with SARS requirements. If you submit a refund then SARS rejects after an audit, not only will you pay VAT on that, but you will incur hefty interest and penalties.
We strongly believe that every business can have a healthy relationship with VAT. It is not as complicated as it is perceived. With the right mindset and discipline VAT can be managed with ease.
If you would like to register for VAT or would like us to help you submit, click any of the links below or contact us here.
