I’m sure we have all heard of the term VAT but do we all understand and know how it works? Tax is not an easy topic to cover because there is vast information to know and understand thoroughly; especially when it comes to business owners.
Value-added tax (VAT) was introduced in South Africa on the 29th of September 1991 to replace GST (General Sales Tax) as an indirect system of taxation.
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 of April 2018 and currently remains the same.
How does it work?
If you are registered for VAT, you need to add 15% VAT to your selling price. For instance, if you sell a product of R100, you need to add R15 to the rate (100×15%), so the inclusive price, which your customers have to pay, is R115.
VAT is generally split into three categories:
- Standard-rated: VAT at 15%
- Zero-rated: VAT at 0%
- Exempt: No VAT
The essential characteristics of VAT are broken down according to the following points:
- VAT generally applies 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.
VAT on sales, or revenue, is called Output VAT.
You can also claim the VAT back from SARS on all the VAT that you have paid for your purchases. So, if you paid R115, including VAT, for a product you bought, you can claim R15 back from SARS.
VAT on purchases is called Input VAT.
To calculate the amount of VAT that you need to pay over to SARS, or claim back, you can deduct Input VAT from Output VAT:
If your Output VAT is more than Input VAT, you will need to pay SARS. If your Output VAT is less than Input VAT, you can claim back from SARS. But it is never that simple. As is the case with most taxes, there are always exceptions. In some cases, you don’t need to charge VAT to a client, and in others, you can’t claim VAT on an expense.
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.
VAT Tips for Small Businesses
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.
· 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.
There is so much more information to know about tax, especially for businesses. If you are not sure about whether your business is getting things right, kindly email me directly on email@example.com and we’ll go through VAT together for your business.