Proposed Changes to the VAT Registration Process
15 November 2013
Posted by: Author: David Warneke
Author: David Warneke (BDO)
The Taxation Laws Amendment Bill No 39 of 2013 (‘the Bill’) proposes a slight overhaul of the VAT registration regime. One of the driving factors behind the overhaul is believed to be the onerous requirements contained in section 23(3)(d) of the VAT Act No. 89 of 1991 (‘the Act’) which have proved to be vastly problematic for start-up businesses applying for voluntary VAT registration. Start-up businesses applying for voluntary VAT registration have to show continuity and regularity of activities in terms of which taxable supplies could reasonably be expected to exceed R50 000 in a period of 12 months. Failing this, registration cannot take place.
According to the Explanatory Memorandum to the Bill (‘the Explanatory Memorandum’), VAT registration requires contradictory considerations. While VAT registration is a critical component of VAT collections, VAT registration poses a risk of unwarranted VAT refunds. In order to balance these risks, SARS must be certain that persons entering the VAT net represent genuine businesses. The proposed solution, as contained in the Bill, is to streamline both compulsory and voluntary VAT registration requirements.
Compulsory VAT Registration Criteria
The compulsory registration criteria in terms of the current legislation contain a predictive element. In addition to registration being compulsory for a person where the total value of taxable supplies made by that person in the 12 month period ending at the end of that month exceeded R1 million, it is also compulsory at the commencement of a month where there are reasonable grounds for believing that the total value of taxable supplies to be made by the person in the immediately succeeding 12 months will exceed R1 million. The predictive requirement is contained in section 23(1)(b) of the Act. The Bill proposes that the predictive element be removed. In terms of the proposal, compulsory registration will in future be necessary where:
• The threshold of R1 million has been exceeded as above; or
• Where the total value of taxable supplies in terms of a contractual obligation in writing during the 12 month period calculated from the commencement of a given month will exceed R1 million. This could apply, for example, to commercial leasing contracts or tenders won from the Government.
It should also be noted that the Bill proposes that supplies of e-commerce services be subject to different registration rules which are beyond the scope of this article.
Voluntary VAT Registration Criteria Originally Proposed
In terms of the voluntary registration criteria the Draft Bill originally proposed a separation into two streams – traditional registration (with the ability to claim refunds from commencement) and fast-track registration (with limited refund claim ability). In terms of the traditional registration criteria, the person must have either been:
A person meeting the above criteria could have claimed VAT refunds from commencement. According to the Explanatory Memorandum, the R5 million threshold was intended to prevent ‘questionable businesses with a hobby-like element’ from entering the VAT system. In terms of the fast-track registration process, the only qualifying criteria was that the person must have been carrying on an enterprise or must have intended to carry on an enterprise that will make taxable supplies within 12 months of the date of commencement of the enterprise. It was not proposed that any monetary thresholds would apply.
- A municipality;
- A designated entity (such as a welfare organisation, foreign donor funded project or parastatal); or
- A person carrying on an enterprise or intending to carry on an enterprise and where taxable supplies will be made within a period of 12 months, provided that the person has incurred expenditure of at least R5 million ‘in connection with the commencement’ of such enterprise or where the person must incur that amount in terms of a written contractual obligation.
However, in order to limit the risk to the fiscus of artificial refund claims, VAT refunds would have been suspended until the Commissioner is satisfied that the vendor had made taxable supplies of at least R100 000 within a continuous period of 12 months from the date of commencement of the vendor’s enterprise. Refunds could have been made as normal from that point onwards. However, should the level of taxable supplies fall below R100 000 over a two year period, the Commissioner had the discretion to deregister such a fast-tracked vendor. The Commissioner has an existing general discretion to cancel a vendor’s VAT registration where he or she is satisfied that the vendor no longer complies with the registration requirements contained in section 23(3) of the VAT Act.
Voluntary VAT Registration Criteria Currently Proposed
According to the Draft Response Document presented by National Treasury and SARS to the Standing Committee on Finance on 11 September 2013 (‘the Draft Response Document’), the proposals above are to be withdrawn and replaced with a softer set of proposals. The decision to withdraw the proposals was in response to various comments on the proposals received by National Treasury and SARS. It was stated that the proposals will place an unbearable burden on small business as the restriction of refunds prevents a cash flow problem for such entities. The R5 million expenditure limit was also described as being onerous and it was suggested as being unclear whether this expenditure threshold includes pre-registration expenditure incurred. It was further suggested that the requirement that the entity make taxable supplies within the following 12 month period should be deleted.
According to the Taxation Laws Amendment Bill No 39 of 2013 released on 18 October 2013., the current R50 000 taxable supply threshold test for voluntary VAT registration will be retained. This means that businesses will be subject to the R50 000 threshold test before qualifying for voluntary registration on the invoice basis. However, businesses that are unable to satisfy the R50 000 threshold will be allowed to register for VAT but only on the payments basis without a withholding of refunds. (The payments basis means that VAT is generally accounted for only to the extent that actual payments are received or made). These businesses will be allowed to remain on the payments basis without having to convert to the invoice basis provided that the value of taxable supplies made by them in a 12 month period does not exceed R50 000. The R5 million threshold category, referred to above, is deleted in view of the scrapping of the proposal to withhold refunds. The commencement date of these proposed rules relating to compulsory and voluntary registration is 1 April 2014.
This article was first published in TaxTalk Magazine - November/December