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Claiming of Denied Input VAT and Audit by SARS

07 March 2011   (0 Comments)
Posted by: Author: Mahomed Kamdar
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Claiming of Denied Input VAT and Audit by SARS

Since the beginning of March 2011, vexing questions on non-refund of VAT from SAIPA members frequently surface in SAIPA’s tax service mailbox.Two issues, namely the claiming of input denied (i.e. motor cars) and VAT audit by SARS are noteworthy in this short briefing note.First, it must be borne in mind that many vendors claim input tax when hiring motor vehicles for periods of two to three days, for business purposes, from motor-hiring companies who are also VAT registered.

Be advised that Section 17 (2) of the VAT Act prohibits an input tax deduction when a motor car is imported, acquired, leased or rented by a vendor. The actual use of the motor vehicle is irrelevant – that is, not relevant whether the car is used for the production of taxable supplies or used for the production non-taxable purposes.A vendor who acquires a motor car for the 100% use of producing taxable supplies is denied an input tax deduction.

SARS, however, holds the view that this proposal is not appropriate because many of the previously-audited vendors continue to claim input VAT when such claims are in disputably denied by the VAT Act.

SARS was questioned about the large volume of non-refund of VAT.SAIPA members raised a further point that the delay in refund of VAT is attributed to the lengthy and time-consuming audits of vendors. Moreover, it is alleged that some of these vendors have been audited before and have been subjected to site visits by SARS as well.SAIPA members argue that the frequent VAT audits on the same vendors are the prime source of delays in VAT refund and, therefore, it is fruit less to audit the same vendors repeatedly.Therefore, it is proposed that only new companies should be subjected to rigorous Audit.

This would facilitate the prompt payment of VAT refund. On the face of it,this proposal makes good sense.SARS, however, holds the view that this proposal is not appropriate because many of the previously-audited vendors continue to claim input VAT when such claims are indisputably denied by the VAT Act.The claiming of denied input VAT – such as hiring of motor cars by vendors – quite obviously necessitates continuous audit of vendors.Both the Income Tax Act and VAT Act allow SARS to call for documents and additional information.More generally, when taxpayers file are turn on e-filing, documents are not submitted. It is logical that SARS would call for evidence (documentary proof) whenever taxpayers claim a deduction.The other reason for delayed refunds and repeated audits arises where VAT vendors frequently have huge refunds due to them. Though SARS does not outright reject the claim they, however, flag that vendor as requiring further scrutiny. It is understandable that members with legitimate claims find the delay in payments unacceptable; however, SARS has indicated that the majority of the VAT refunds that they have investigated proved to be illegitimate claims and have been denied. The recent case between Engelbrecht versus the State, and heard on 7 March 2011, is a noteworthy case in point. In this case, although vehicles were supposed to be exported to Namibia and thus qualified to be zerorated, they were never exported to the purchasers listed in the relevant document in Namibia. Instead, the vehicles were delivered to local car dealers and were subsequently sold locally. It is clear that this scheme was intended to defraud SARS of output VAT.The down side is that the few legitimate refunds also suffer the delay in release of their monies and lengthy audit recesses.Perhaps, it could be helpful if, occasionally, we change our mindset.It is, after all, legally missible for SARS to require additional information.Therefore, practising accountants should always advise constant readiness through planning and preparation of their clients for an audit, just in case.

SARS conducts random audits from time to time– all taxpayers are expected to be audited once in every five years– some taxpayers have been audited three times and consecutively during the five-year period. The Income Tax Act and VAT Act allow SARS to undertake audits.

Source: By Mahomed Kamdar ,Technical Advisor, SAIPA (Tax Professional)


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