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Adjusting for VAT

Monday, 25 March 2013   (0 Comments)
Posted by: Author: Doria Cucciolillo
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Source: Doria Cucciolillo 

Where the calculation of Value-added tax (VAT) is concerned, sufficient knowledge of the specific entity and its business activities are important factors to consider. In practice it can easily happen that a VAT return is incomplete if the calculation of VAT is solely based on the documentary evidence provided by a client, for example tax invoices and credit notes.

In certain instances, a vendor will be required (or allowed) to make adjustments to its output and input tax estimations. The purpose of this article is to investigate the different situations that may attract additional VAT implications. From a tax practitioner’s point of view it is important to look out for these types of events in order to prevent the understatement of a client’s VAT liability and additional taxes (penalties and interest) that may be imposed. In addition, extra input tax credits may be available and can be utilised to reduce a vendor’s VAT liability.

Considering the current state of the global economy, it is almost certain that some clients will be unable to settle their outstanding debts. Fortunately, a vendor will be entitled to claim an input tax deduction if these amounts are written off as bad debts. The input tax deduction is set at the total debt discharged multiplied with the tax fraction. In order to allow this deduction, the South African Revenue Service (SARS) must be convinced that the debt genuinely became irrecoverable and that the transaction does not merely exists on paper. Therefore the vendor’s accounting records must reflect the waiver of these debts and its validity must be confirmed by the vendor’s actions. He or she had to end all personal actions aimed at recovering the debt or had to appoint a third party, like an attorney to collect these amounts. Unfortunately the opposite may also apply and the vendor will become liable for output tax during the period in which a creditor’s balance becomes outstanding for more than 12 months.

It is important to note that the above adjustments will only affect vendors that are registered on the invoice basis (for example: natural persons with an annual income that exceeds R2.5 million in value, companies and closed corporations). This is because the initial VAT implications were accounted for when a tax invoice was issued. Therefore, a reversal must be made if output tax was previously declared on taxable supplies that were made to debtors. Similar to the above provisions, a vendor must account for output tax if he or she was initially entitled to claim an input tax deduction on the acquisition of goods or services but failed to settle the amounts due to its creditors within 12 months.

Furthermore, settlement discounts will also have VAT implications for vendors registered on the invoice basis. If such discount is received from a creditor and it relates to an amount on which an input tax credit was previously claimed, the vendor must account for output tax on the discount received. The same principle will apply if discount is granted to customers for early settlement of their debts. An adjustment can be made to reverse the initial output tax that was recognised when the invoice was issued.

It is clear from the above that a person involved in the calculation of VAT must first consider the accounting basis on which a vendor is registered, before attempting a VAT calculation. If the invoice basis is applicable, he or she must be convinced that the full VAT implications of credit transactions are accounted for. Specific information to look out for includes bad debts, trade discounts and the outstanding period of creditors.

VAT adjustments are not limited to transactions that relate to an entity’s debtors and creditors, but may also arise from certain other events. In the following section these events will be addressed.

A situation that is often experienced in practice is that an asset is removed from a business’ operating activities and applied by the owner for private purposes. In such an instance, output tax must be declared by applying the tax fraction to an amount equal to the market value of that asset on the date the change in use occurred. This provision will apply whenever an asset was initially applied to make taxable supplies (given that an input tax credit was allowed with acquisition) and an event occurred which led to a change in use of the asset for non-taxable purposes (for instance, to make exempt supplies). This adjustment must be made during the tax period in which the change in use occurs.

If the vendor was not able to claim the full input tax deduction with acquisition of the asset, he will be entitled to claim an input tax credit when the change in use occurs. The input tax credit is calculated by applying the tax fraction to the lesser of the adjusted cost of the asset (including VAT), the market value on the date that any previous adjustment relating to the asset was made or the market value on the date the change in use occurred. The credit must be apportioned to the extent that the asset was applied for non-taxable purposes.

It may happen that a vendor used an asset for non-taxable purposes (for example private usage) and then decides to apply it in its business to make taxable supplies. In this case, an input tax adjustment may be claimed provided that it is not denied in terms of the VAT Act (for example: a "motor car” as defined or assets used for entertainment purposes). In this scenario the calculation of the input tax credit will be exactly the same as the above calculation but it will be apportioned to the extent that the asset will be used to make taxable supplies.

Finally, a VAT adjustment will also be required if an asset is already used to make taxable supplies, but a change in usage occurs. If the taxable usage of the asset increases, the vendor will be entitled to claim an additional input tax credit. On the contrary, a decrease in taxable usage is associated with an adjustment for output tax. The first mentioned adjustment for output tax will apply if the taxable usage of an asset descents to zero. This means that the full amount will be subject to VAT without any apportionment, but input VAT may be claimed to the extent the asset was used for non-taxable purposes.

The adjustment is made at the end of the vendor’s year of assessment. The calculation involves applying the tax fraction to the lesser of: the adjusted cost of the asset (including VAT), the market value of the asset on the date any previous adjustment was made or the market value of the asset at the end of the year of assessment in which the change in use occurred. The adjustment must be apportioned to the extent that an increase or decrease in taxable usage took place.

It is important to note that no adjustment needs to be made when input tax is denied in terms of the VAT Act, the adjusted cost of the asset (excluding VAT) is less than R40 000 or the change in usage does not exceed 10 per cent.

VAT is considered as a system that revolves around tax invoices and to some extend this is true. However VAT implications may arise from certain business activities for which no documentary proof may exists. Without proper knowledge of a vendor’s business operations, the required VAT adjustments arising from the above mentioned events can easily be left out. 



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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