How to ensure that your VAT refund is released as quickly as possible
20 August 2014
Posted by: Author: Erich Bell
Author: Erich Bell
(SAIT Acting Head of Tax Technical)
For start-up and small businesses with a lack of collateral,
a positive cash flow is of paramount importance to ensure that activities can
take place as scheduled and that the business can expand. However, as most
small business owners might be aware, maintaining a positive cash flow is
rather the ideal than the norm and money must literally be squeezed out of all
available avenues to prevent the director’s loan from growing. This article
will focus on one such avenue that may very well be the best medicine for a
small business’ cash flow problems – VAT refunds.
A vendor (a business that is registered for VAT) would be in
a VAT refund position where the VAT it has to pay (output tax) on the goods and
services supplied by it do not exceed the VAT it may claim (input tax) on the
goods and services it used to make those supplies. Vendors would therefore
normally be in a VAT refund position where they’ve incurred significant
start-up costs; are in the business of supplying zero-rated goods and/or
services or if their sales have dramatically fallen during a particular period.
Without being too technical, a VAT refund would be generated
once a vendor has submitted its VAT return for a particular period which will
then be used by SARS to assess the vendor. However, the ‘coming into existence’
of the VAT refund normally requires various interventions from the vendor’s
side, as can be seen below.
Due to the high amount of VAT fraud encountered in the past,
the VAT Act does not allow SARS to release a VAT refund until the vendor’s
banking particulars have been successfully verified. This verification would
require the vendor (or its representative if the vendor is a juristic person)
to personally visit a SARS branch with all of the relevant material required to
prove the authenticity of the bank account. The relevant material that is
required to verify the banking details can be found on SARS’ website.
The VAT Act furthermore prohibits SARS from releasing a VAT refund
if the vendor has outstanding VAT returns. It is therefore important to ensure
that all returns are submitted timeously before the deadlines as prescribed in
the VAT Act. The frequency at which a VAT return must be submitted depends on the
category for which the vendor is registered. VAT periods may range from monthly
to yearly with a bi-monthly VAT period being the most common. Furthermore it is
important to ensure that a return is completed as accurately and comprehensively
as possible to prevent SARS from using this defence when the vendor requests
interest on a delayed refund.
As a measure to combat fraud, SARS would in almost all VAT
refund situations request the vendor to submit input and output schedules as
well as the tax invoices (or a sample thereof) for the relevant period. These
schedules and invoices would then be scrutinised to ensure that the vendor’s
VAT for the period was correctly calculated. Furthermore, SARS may also choose
to audit the vendor, which is a more formal and intense process where the
vendor must be furnished with letters indicating that it was selected for
audit, the progress of the audit and the letter of findings stating the outcome
of the audit. SARS will normally also visit the premises of the vendor to
perform an inspection to determine if the vendor is carrying on an enterprise. The
VAT Act would in such circumstances also prohibit SARS from releasing the
refund until the above processes have been finalised, unless the vendor
provides appropriate security to SARS for the refund.
Therefore, if the vendor successfully verified its banking
details, submitted all of its returns and SARS is satisfied that the VAT was
correctly calculated based on the material requested or on the outcome of the
audit, then SARS ought to release the refund without any delay. However, as
with everything in life, where humans are involved, errors are bound to occur.
To cater for this, the VAT Act contains two mechanisms that may be used by the
vendor to limit the damage and to serve as compensation where a VAT refund was
not timeously released by SARS.
Firstly, the vendor may request SARS to pay interest on the
delayed refund if all of the above requirements were met and the refund was
still not released. Generally, interest will start to accrue to the vendor
after 21 business days have lapsed from the date on which the refund became
due. The refund will normally become due after the following has been
concluded: outstanding returns were submitted, banking details were verified,
relevant material was processed, audit concluded or inspection was carried out
by SARS. It is important to note that SARS would not automatically calculate
the interest on the delayed refund and that this interest must be requested by
the vendor by submitting a letter to SARS.
Secondly, apart from the interest that may be requested, the
Tax Administration Act allows the taxpayer to object to SARS’ decision not to
release the refund.
To conclude, although VAT may be regarded as a simple form
of indirect tax, there are a lot of pitfalls when it comes to the administration
thereof. Vendors or businesses wanting to register as vendors are strongly
advised to make use of the services of a SAIT registered tax professional who
would be able to ensure compliance with the VAT Act from the get-go. As stated
above, the boost your cash flow stands to gain from a large VAT refund, or
alternatively, the knock it can take as a result of penalties, can very well be
the difference in taking your venture to new heights or driving it into the