If you are a small business owner or entrepreneur, and you don’t know where to start regarding Value-Added Tax, this basic guide will help you get started.
What is VAT?
Value-Added Tax is commonly known as VAT.
VAT is an indirect tax on the consumption of goods and services in the economy. VAT is administered by and payable to the South African Revenue Service (SARS). It is government’s second biggest source of income.
Value-added tax (VAT) increased from 14% to 15% from 1 April 2018 and it is levied on all goods and services subject to certain exemptions, exceptions, deductions and adjustments provided for in the Value-Added Tax Act, 1991.
Who should register for VAT?
According to SARS regulations, VAT registration becomes compulsory when your business’s revenue from taxable supplies exceeds R1-million per year. A person who is registered for VAT is referred to as a vendor.
Voluntary registration was introduced for companies who are not yet earning (generating) as much revenue, but want to offer and receive the benefits associated. A vendor making taxable supplies of more than R50 000, but not more than R1 million per annum may apply for voluntary registration.
When your business has registered as a VAT vendor it is obliged to charge (levy) VAT (or output tax) at 15% on all goods sold and services rendered to your customers/clients (unless the goods are zero-rated or exempt).
What are the benefits of registering for VAT?
Once you are registered for VAT, potential clients and customers could view you as a reliable and trustworthy business.
Claiming input tax deductions, or the VAT you pay for goods and services, effectively reduces your business costs by the VAT amount.
As a VAT registered entity, you afford your clients the same benefits, which means doing business with you is more appealing to them.
You are required, by law, to frequently file returns which in most situations will be every two months , so you will have to maintain comprehensive and up-to-date financial records, which is beneficial for your business.
To be eligible to vie for tenders especially with the government, your business needs to have a VAT number. Large companies also prefer to deal with businesses with a verifiable VAT number when sending quotes and invoices.
Since VAT is set as an additional percentage to the actual price of a product, the burden of this tax always falls upon the consumer. So, as a business or vendor, you do not have to worry that it will be deducted from your operational costs.
Things to keep in mind
If your business has not registered as a VAT vendor then your business cannot charge VAT on the sale of goods or rendering of services to your customers/clients.
VAT returns have to be filed every two months (even or uneven months). This means you will need to ensure your administration is up to date on an ongoing basis. Otherwise you could face penalties and interest. Note: there are other periods for filing VAT too, which could be annually, every six months or even every month.
Your transactional documentation needs to be adjusted to comply with all SARS standards. There are wording and numbers that have to appear on your invoices to make them compliant. Read more about the checklist for VAT invoices here.
VAT is generally based on what is called the accrual system. That means that the VAT is calculated on the invoices you have issued whether those invoices have been paid or not. So it is important that you budget your cashflow to cater for the VAT payments to SARS.
It is in your best interest to make sure that VAT is managed correctly. Be sure you charge the correct VAT on every transaction.
It is possible to apply to cancel your VAT registration if the value of taxable supplies falls below the limit of R1 million, or if all business activities have stopped.
Calculating VAT returns
A = How much VAT did you charge you customers?
B = How much VAT did you pay to your suppliers?
A minus B = the amount of VAT payable/refundable to/from SARS.
Note: It’s in your company’s best interests to have an experienced accountant handling your VAT. Taking this seriously from the beginning is often the difference between a business being successful and having to file for bankruptcy.