VAT. How it works, whether to register and how to register
When I recently checked our most read blog posts, I found that the explanation of Input and Output VAT was the most read at 8775, followed by an explanation of Exempt and Zero rated supplies at 8502. Clearly, there’s a big need for this sort of information so here’s a more complete guide –
VAT is charged by VAT registered vendors on most of their sales. They pay the VAT over to SARS as Output VAT (think of goods and services going OUT[put] from the vendor). Certain goods (particularly some foods) and services (such as interest charged) are exempt from VAT and exports are zero rated for VAT.
VAT paid on purchases is claimed back from SARS by registered vendors as Input VAT (think of it as the VAT on goods and services coming IN[put] to the vendor).
Input VAT cannot normally be claimed in respect of certain supplies including entertainment, staff welfare, motor cars including twin-cabs. Neither can it be claimed if you are not VAT registered.
The VAT in bad debts written off can be claimed back as Input VAT.
Input VAT may be claimed up to five years after the transaction date. Hence if your input VAT claim in any period exceeds your output VAT liabilitiy, it is a good idea to hold back on part of the input VAT claim so that you do not find yourself in a position where SARS owes you a refund as this will usually lead to an audit which can be very wasteful of your time and energy.
The difference between VAT Exempt and Zero rated
Certain supplies are exempt from VAT. Most notable amongst these are rental of residential property and certain foodstuffs. Note that rental of commercial property is a VATable supply.
If you sell VAT exempt supplies, you cannot claim Input VAT on the goods and services that went into the making of those supplies (such as building maintenance, flour, oils, salt etc.).
A fairly wide range of basic foodstuffs together with diesel, petrol, illuminating paraffin and exports are zero-rated as distinct from exempt.
If a business is sold as a going concern by a VAT registered vendor to another VAT registered vendor along with the assets necessary for the business to continue as a going concern and as long as a number of conditions are complied with, the transaction is zero rated. It is critical that the contract of sale be drawn up by professionals, such as Harbour and Associates, who are completely familiar with the requirements to qualify as zero rated.
Most fee-based financial services are subject to VAT, so your bank charges, for instance will have claimable VAT added.
If you supply zero rated items, then, because they still carry VAT (albeit at zero rate), you are making VATable supplies and can claim Input VAT on any goods or services that went into those zero rated items.
Whether to register
If your annual turnover is R1m or more you have no choice, you must register as a VAT vendor. If you don’t then SARS can deem that all of your invoices included VAT and demand that you pay it over to them (plus penalties and interest).
If your turnover is, or is expected to be, R50 000 per annum, you may register. If you do, you will be able to claim back all of your Input VAT, but you will have to charge output VAT, so your prices will increase by 14%. This doesn’t matter if you are supplying mostly to VAT registered customers who will then calim it back, but if you supply mostly to the general public, then it will put you at a price disadvantage.
Also your debtors list will include VAT that you have paid to SARS, but have not yet collected from the debtors. This will negatively affect your cash flow. (But see my post on managing your debtors).
And you have to submit a VAT return and payment every two months, which means you must always be on top of your bookkeeping.
How to register
Don’t try to do it yourself. You’ll find it is a nightmare. If you engage us, it will be painless. You will have to prove that your company has done, or can be expected to do, R50 000 per annum turnover. SARS have recently allowed proof of an average of R4 200 per month during the two months prior to registration as sufficient proof because 12 x R4 200 = R50 400. The tax affairs of the directors and the company must be in order and there are various other things that need to be proved, but none of them onerous.