Why is it so important to manage VAT in your Business?
05 October 2015
Posted by: Author: Erich Bell
Author: Erich Bell (BDO South Africa)
The VAT Act allows a vendor to only claim an input tax deduction on expenses incurred if the vendor is in possession of a 'tax invoice' that complies with the VAT Act. SARS stringently polices the requirements surrounding tax invoices, which is evident from the fact that in one month two similar cases were won by SARS where taxpayers did not discharge the burden of proof to claim input tax deductions.
The most recent tax case (released on the 21st of September 2015 (TC VAT 1129 SG)), highlights the importance of proper record keeping to substantiate input tax deductions. The taxpayer, a newly registered vendor, claimed input tax of R6 465 622.50 over three two-monthly tax periods. SARS requested the vendor to provide it with valid tax invoices to support the input tax deduction but the vendor failed to do so. The vendor provided SARS with unstamped bank deposit slips, quotations from various suppliers, invoices issued to persons other than the vendor or, which did not reflect the name of the purchasers and invoices relating to goods that could not have been used in the vendor's construction business. SARS denied the input tax deductions and the matter went to court. In the tax court the vendor was unable to produce valid tax invoices and relied on the other evidence provided to SARS. In an attempt to convince the court, the vendor contended that he did in fact provide valid tax invoices to an unnamed SARS official at the Springs office who subsequently lost them. The vendor argued to be absolved from the responsibility to produce valid tax invoices. SARS testified that it only accepts original documents for batch scanning after which it would return the originals to the taxpayer. SARS testified that it made the vendor aware of the provisions of the VAT Act that allow him to request suppliers for copy tax invoices where the original tax invoices were lost. Despite this, the vendor still failed to obtain copy tax invoices. The vendor's failure to produce original or copy tax invoices led to the tax court dismissing the appeal.
The judgment was silent on penalties and interest that were imposed on the vendor. However, from past experience, the vendor could potentially be subject to the following:
- Understatement penalties of 200% on the shortfall in case of intentional evasion;
- Interest on shortfall and a fixed penalty of 10% of the shortfall; and
- A fine or imprisonment not exceeding 5 years in cases of intentional tax evasion.
Vendors should, as a result, ensure that all input tax deductions are substantiated by proper documentation as required by the VAT Act. This would mostly consist of a valid tax invoice or copy tax invoice as envisaged by the VAT Act. These documents should be retained for 5 years from date of submission of the relevant VAT return to avoid criminal charges.
This article first appeared on bdo.co.za.