What are the common costly VAT mistakes?
05 October 2015
Posted by: Author: Seelan Muthayan
Author: Seelan Muthayan (BDO South Africa)
VAT is levied at 14% on the value of taxable supplies made by a vendor in the course or furtherance of an enterprise carried on by that vendor. Even though South Africa's VAT regime may seem straightforward, there are numerous pitfalls if VAT is not considered as part of business decisions. Below we discuss the most common mistakes made by vendors. These mistakes could result in penalties, interest and understatement penalties when uncovered by SARS.
The VAT system prevents cascading VAT by allowing a vendor who acquires goods or services for purposes of making taxable supplies to claim an input tax deduction. A vendor is entitled to an input tax deduction and it would charge VAT on subsequent supplies. To prevent leakage, the VAT Act contains specific rules to determine the extent to which goods or services are used for purposes of making taxable supplies and resultant changes. Where goods or services were acquired to make taxable supplies and subsequently applied for purposes other than making taxable supplies, the vendor is required to make an input tax adjustment. This is often encountered where companies donate trading stock and capital infrastructure such as computers as part of their corporate social investment programme for Broad-Based Black Economic Empowerment purposes.
A vendor must account for VAT on the invoice or payments basis. The invoice basis requires VAT to be accounted for in the tax period in which an invoice was issued or received, whilst the payments basis requires VAT to be accounted for to the extent that payment is made or received. Vendors registered on the payments basis that claim input tax on goods or services before payment has been made may be subject to the penalty and interest clauses. The VAT Act also has special rules to prevent a vendor on the invoice basis from claiming an input tax credit before making payment for the supply. Where a vendor claims an input tax deduction in a tax period but has not paid the full consideration within 12 months after the tax period, the vendor must account for VAT on the unpaid balance as at the end of the 12 months. In terms of the VAT Act, where the terms of a written contract provide for the consideration to become payable after the tax period in which the input tax deduction was claimed, the 12-month rule only starts at the end of the month in which that portion of the consideration became payable. This rule does not apply to debts that arose from taxable supplies made between two vendors forming part of the same group of companies.
Documentation drives compliance with the VAT system. The VAT Act specifically requires that a vendor must be in possession of a valid tax invoice or credit note to claim an input tax deduction. Tax invoices and credit notes should be retained for five years. The VAT Act sets out the requirements for a tax invoice to be valid and the requirements for a valid credit note. Where these requirements are not met, a vendor's input tax deduction is denied. A common misconception is that an invoice (i.e. a document notifying the obligation to make payment) amounts to a tax invoice.
Various pitfalls are also encountered with regard to electronic invoices which are subject to additional criteria to constitute a valid tax invoice. These criteria include inter alia that the parties must agree in writing that electronic invoicing would be done, the electronic invoices must sent in encrypted format (at least 128 bit) over a secured line, and certain criteria in the Electronic Communications and Transactions Act must be adhered to.
Where a vendor claimed input tax without being in possession of a valid tax invoice or credit note, SARS can impose understatement penalties.
A vendor is a person who is or is required to be registered in terms of the VAT Act. Compulsory registration applies in one of two scenarios. On a prospective basis, a person is required to register as a vendor at the commencement of the month in which the total value of its taxable supplies in terms of a contractual obligation in writing will exceed R1 million in the following 12 months. On a retrospective basis, a vendor is required to register at the end of the month where the total value of its taxable supplies in the period of 12 months ending at the end of that month exceeded R1 million.
As a vendor includes a person who is required to be registered, non-registration would not suffice as an excuse for not levying output tax where the person was required to be registered. In this instance, the VAT Act deems all prices charged by the vendor for taxable supplies to include VAT, which allows SARS to recover VAT directly from the vendor even though the vendor may be of the view that their prices did not include VAT.
Where a vendor acquires goods or services partly to make taxable supplies and partly for exempt purposes, the VAT Act requires the input tax to be apportioned to the extent that taxable supplies would be made with the goods or services. SARS allows vendors to use the standard turnover-based method to calculate the extent to which input tax may be claimed, without a ruling. If a vendor wants to apply another method, they need to obtain a SARS ruling. Should a vendor apportion their input tax in the absence of a ruling and not use the standard turnover-based method, they would be subject to tax risks, including understatement penalties.
These simple pitfalls illustrate that there are various exceptions to the general rule of levying output tax at 14% and claiming input tax on the acquisition of goods and services. Although VAT is a transactional tax it does not in fact or in law mean that VAT only needs to be considered after conclusion of a transaction. With the pace at which transactions are taking place in the 21st century, a firm's VAT position needs constant monitoring. Vendors who are exposed could potentially qualify for the relief offered by the voluntary disclosure program.
This article first appeared on bdo.co.za.