Vat - in a nutshell

Whether your business is registered as a Close Corporation, 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.

If your annual turnover is likely to be in excess of R1 million per year, by law you must register for value-added tax. 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 deducted from your income as such) that is currently levied at 14% 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:

VAT is levied on the value of the goods or services - whether by sale, rental agreement, instalment credit agreement and all other forms of supply. Where supply between unconnected parties is done at no cost, no VAT is charged.

Registering for VAT

Businesses with a turnover (or a forecasted turnover) of more than R1 million per year are obliged to register as a VAT vendor. From July 2008 the threshold is R1,5 million for businesses that submit returns every 4 months.

A person can also register voluntarily if turnover in a 12 month period has, or is likely to, exceed R20 000, but is less than R1 000 000. Where the enterprise is an accommodation business, the minimum turnover limit is R48 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, which is available from below or from the SARS website. Take note: if you operate more than one business under one entity, you must only register once for VAT.

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.

VAT compliance

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
• The value of the goods/services including VAT
• The name, address and VAT registration number of the person buying the goods/services
• And your own 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 (14/114) 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.

If your turnover is below R300 000 in a 12-month period, or you close your business, you may apply to deregister. The cancellation takes effect from the last day of the tax period in which you applied to cancel, so make sure you don't owe anything before you ask to be deregistered.

The VAT cycle

The frequency with which you have to pay VAT to SARS depends on what "taxable period" you qualify for. The Commissioner will allocate a tax period to every vendor, although there are standards that apply.

There are four categories of tax periods: A, B, C and D. Categories A and B requires VAT returns to be submitted every two months.

Small businesses with an annual turnover of less than R 1,5 million, must submit VAT returns every four months. However, they may choose to stay on the two-monthly return cycle if so desired. Also, vendors that do not fall into C or D will be part of A or B.

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

The date by which you must make your VAT payment depends on which tax category you fall into. Payments are made in:

• January, March, May, July, September and November for Category A
• February, April, June, August, October, December for Category B
• Category C required VAT returns to be submitted every month. If your annual sales exceed R30 million, you automatically fall into Category C
• Category D only applies to certain farmers and requires returns to be submitted every six months

You can pay VAT:

• By posting a crossed cheque made out to the South African Revenue Service. This is probably not the safest way to pay your VAT, and there's no using the excuse: "It got last in the mail..."
• By cash or cheque at any SARS office; if you do it yourself, you know it's done
• Electronically via the internet (details on the SARS website)
• By payment at any major bank

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.