What is VAT?
Value Added Tax (VAT) is an indirect tax on the consumption of goods and services in the economy. Revenue is raised by the government by requiring certain businesses to register and to charge VAT on the taxable supplies of goods and services. That might seem a little complicated but the basics of VAT are actually SIMPLE!
The basics of VAT are simple
VAT is charged at each stage of the production and distribution process. VAT is presently levied at the standard rate of 15% (change from 14% on 1 April 2018) on the supply of most goods and services and on the importation of goods. The VAT on the import of goods is collected by customs. There is a limited range of goods and services whichare subject to VAT at a zero rate or are exempt from VAT. One example of exempt items is basic foodstuffs.
Any person including individuals, partnerships, trust funds, foreign donor-funded projects, and municipalities that carry on business may register for VAT. In order to register, an application form must be completed and a specific process must be followed.
Who can (or must) register for VAT?
- If the taxable supplies made or to be made is, in excess of R1 million in any consecutive 12-month period.
- Existing or future businesses that have a written contractual commitment to make taxable supplies exceeding R1 million within the next twelve months.
A person may also choose to register voluntarily if the taxable supplies made, in the past period of twelve months, exceeded R50 000. As from the 1st of March 2012, qualifying micro-businesses that are registered for Turnover Tax may also choose to register for VAT provided that all the conditions for voluntarily registration for VAT are met.
The PRO’s and CON’s
Now that we have the basics of VAT explained let’s get into the pros and cons of VAT.
- Dependent on the type of business, the claiming of input tax deductions could be regarded as a benefit. The VAT you pay for goods or services used, consumed, or on-supplied in making taxable supplies is claimed back and this then reduces your cost by the VAT amount
- If your customers are bigger companies that can claim the VAT you charge back.
- The requirement to file returns on a bi-monthly basis does force compliance and proper accounting records for the business to keep its records in order. Which can only benefit them in the long run.
- If you are owed a refund, You will get that money back into your bank account.
- Many tender processes and large companies require a company or entity to be VAT registered in order to carry out the business.
- Businesses may have to carry the ‘cost’ of the VAT – which must be declared to SARS – until the business receives payment from its customer.
- The cash flow of smaller and newer companies generally does not accommodate the money needed to pay VAT when it is due.
- Business owners may spend too much time on admin – salaries, wages, PAYE, SDL and UIF and bi-annual IRP5 rather than focusing on growing they businesses.
- Once you are VAT registered, you may incur additional costs. You may need to hire a bookkeeper or an accounting firm to make sure you keep track of accounting and admin to do proper VAT reporting back to SARS. Outsourcing accountant – read more here
- In specific companies, mainly service companies, there are few expenses to claim the VAT back from. This is due to the company “selling” a service rather than a product. Eg: an accountant does not have a ‘product’ to sell but rather a service. The main expense in these companies is generally salaries and wages.
The registration for VAT can be a compulsory or voluntary decision. The pro’s and con’s however can vary immensely for different industries and specific companies.
If you would like more info or would like to register for VAT, please contact us.
More information is available here:
All the information in this post, is available on the SARS website: www.sars.gov.za
This blog post was updated on the 17th June 2020
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