This is article number three in the series What taxes should my business comply with? In the piece published on 03 April 2018 we listed a range of taxes that you will need to consider when running a business. In this piece we will look at value added tax (VAT) and how it impacts on the business.
What is VAT?
VAT is an indirect tax; this means that the government gets money from the manufacture or sale of goods and services, rather from direct payments from the tax payer to the government. Up until 31 March 2018 VAT was charged at 14%, however treasury increased the VAT rate to 15% effective 01 April 2018.
Who is liable to pay VAT?
Every single transaction done in the business ecosystem by a VAT vendor will attract VAT, however at different rates. That means if your business is a registered VAT vendor all receipts from your clients will contain a VAT portion. Similarly, every transaction you conclude with another VAT vendor will contain a portion of VAT.
The VAT act stipulates that if your business operation generates a turnover of greater than R 1 000 000 per annum that you are liable to register as a VAT vendor. However, if your business generates more than R 50 000 per annum but less than R 1 000 000 registration is voluntary.
How does VAT “work”?
Let us for the moment assume that your business is a registered VAT vendor. You are then obliged to collect VAT at a rate of 15% on all vatable sales and pay those collections over to SARS after the respective VAT periods. Accountants refer to this as output tax. Similarly, the consideration you pay to your suppliers, will contain a portion of VAT at 15%. Accountants refer to this as input tax.
The VAT act allows all VAT vendors to set-off all input taxes – if it is a registered VAT vendor – against all output taxes.
This is best explained with the help of an example. Your business is a registered VAT vendor. For the period 01 January 2018 to 28 February 2018 it generated sales (inclusive of VAT) to the value of R 342 000. In order for the business to have generated that income it acquired services and materials from suppliers totaling R 285 000 (inclusive of VAT).
In the above example your business has collected R 42 000 worth of VAT from customers and paid R 35 000 worth of VAT to its suppliers. When your accountant submits the VAT returns you will be able to net off the input taxes to the output taxes and only the difference is payable to SARS. If you find that your input taxes exceed the output taxes, SARS will in turn refund you the amount.
Taking the above into consideration your VAT return will contain the following information:
Input VAT claimed (R 35 000)
Output VAT payable R 42 000
VAT payable to SARS R 7 000
When is VAT payable to SARS?
All businesses with an annual turnover less than R 30 million will find itself on a bi-monthly VAT schedule whereas entities with a turnover greater than R 30 million will be on a monthly VAT schedule.
VAT returns and payments are due to SARS by the last day of the month following the end of the reported VAT period. If, however payments are not made electronically the payments are due by the 25th day of the month.
Please note that this is intended to be an informative piece and does not deal with all the intricate rules relating to VAT on imports, exports, second hand goods and zero-rated items. Please contact Five Oaks Consult for a more in-depth discussion on the more technical VAT rules and regulations.