Whether your business is registered as a Sole Proprietorship or Private Company, there are various tax requirements you have to meet and one of these could be value-added tax (VAT). Here is a broad explanation of what VAT is and how to meet your tax obligations as a small business.
It is mandatory for any business to register for VAT if the income earned in any consecutive twelve month period exceeded or is likely to exceed R1 million. Any business may choose to register voluntarily if the income earned, in the past twelve month period, exceeded R50 000. Although this will add to your administration workload, it can also benefit your company in that you'll be able to claim VAT back on your expenses.
What is VAT?
VAT is an indirect system of taxation (which means it's not directly deducted from your income) that is currently levied at 15% (as of 1 April 2018) on the value of all goods and services supplied by vendors. It doesn't matter if the supply of the goods is of a capital or trading nature. The VAT system is not as complicated as it may seem. It works like this:
- You buy your goods from your supplier. The price will include VAT.
- You sell these goods to your customer, charging VAT on the goods sold.
- The difference between the VAT you paid and the VAT you have collected, you will pay/claim to/from the Receiver of Revenue according to the VAT cycles.
VAT is levied on the value of the goods or services – whether by sale, rental agreement, instalment credit agreement or any other forms of supply. Where supply between unconnected parties is done at no cost, no VAT is charged.
Registering for VAT
Businesses (both existing and future) with an actual turnover, forecasted turnover, or a contractual commitment to make a turnover of more than R1 million per year are required to register as a VAT vendor. A business can also register voluntarily if turnover in a 12 month period has exceeded R50 000. For commercial rental establishments in particular, the turnover threshold for voluntary VAT registration is R120 000.
A vendor is any person who is required to register in terms of the VAT Act. A "person" includes any natural person, public or local authority, company, trust, body of persons (i.e. partnerships) and the estate of any deceased or insolvent person.
An enterprise is any regular activity carried on in or partly in the Republic of South Africa, whether or not for profit, in the course of which goods are sold or services are rendered. There are specific inclusions and exclusions relating to enterprises.
To register for VAT, you need to complete a VAT101 form. Take note: if you operate more than one business under one entity, you must only register once. Once you've registered, SARS will let you know in writing what your registration details are, the date on which it took effect and the tax period allocated to you.
For any sale of more than R50, you have to issue a tax invoice, with the word "tax invoice" printed on it. This is the most important document in the VAT system, so make sure you get it right. The invoice must contain:
- The value of the goods/services excluding VAT
- The VAT calculated at 15% of the value of goods/services
- The value of the goods/services including VAT
- The name, address and VAT registration number of the person buying the goods/services
- Your business name, address and VAT registration number
All the sales during a VAT cycle must be totalled with the VAT amount. By applying the VAT fraction (15/115) to the total sales amount, the amount of Output VAT is calculated.
For a vendor to be allowed to deduct input VAT from output VAT when calculating how much he must pay to SARS after the end of the VAT cycle, he must have a valid tax invoice from the vendor who supplied the goods or services to him. Input VAT must be split between amounts relating to capital goods/services bought and goods and services of a revenue nature.
The VAT cycle
The frequency with which you have to pay VAT to SARS depends on what "taxable period" you qualify for.
The tax periods that are available are classified into six categories namely:
Under this category a vendor is required to submit one return for every two calendar months, ending on the last day of January, March, May, July, September and November.
Under this category a vendor is required to submit one return for every two calendar months, ending on the last day of February, April, June, August, October and December
A vendor is required to submit one return for each calendar month. A vendor will fall within this category if the turnover exceeds or is likely to exceed R30 million in any consecutive period of 12 months, the vendor has applied in writing to be placed in this category or repeatedly failed to perform any obligations as a vendor.
Under this category, a vendor submits one return for every six calendar months, ending on the last day of February and August. This category applies mainly to a vendor who carries on farming activities with a total turnover of less than R1.5 million for a period of 12 months.
This is commonly referred to as the annual tax period because a vendor is required to submit one return for 12 calendar months. The vendor must, amongst other things, be a company or trust fund in order to fall within this category. The additional criteria to fall within the ambit of this category are set out in Chapter 3 of the VAT 404 guide.
This is a four-monthly tax period that was introduced, effective from 1 August 2005, to assist small business. The four month period for each year is as follows:
- March to June to be submitted in July
- July to October to be submitted in November
- November to February to be submitted in March
A VAT return must be submitted within 25 days of the end of each VAT cycle or the business can face penalties and interest on late submission. Penalties are 10% of the amount payable and interest is levied at the standard charge for interest.
Also, it's important to know that you have to keep your records for a period of five years from the date of the last entry in any book, as SARS can ask to see these records at any time within this timeframe.
Making VAT payments
For businesses that file their VAT returns and make payments electronically, the VAT must be paid by no later than the last business day of the month after the end of the tax period.
For all other businesses, the VAT must be paid by no later than the 25th day after the end of the tax period.
VAT payments can be made through one of the following channels:
- SARS branches(Cheques only - no cash are accepted)
- Electronic Funds Transfer (EFT)
- Debit Order and eFiling
- Various banks
Please note: This information was correct at the time of publication, but can change at any time. For more detailed information and any updates on issues surrounding VAT, claims, exemptions, filing and other tax issues, visit the SARS website on www.sars.gov.za.
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