Do you remember before the year 1991 when South Africa used the indirect taxation system, called General Sales Tax (GST)? Since then, it became known as Value Added Tax (VAT) and went from a tax rate of 10% to 14% where it stayed for 25 years. VAT was increased to 15% on 1 April 2018. But what does VAT really mean and, as a business owner, do you know the ins-and-outs of VAT?
What is the purpose of VAT?
Value Added Tax is known as a consumption tax, which is an indirect tax, and is placed on a product wherever value is added at each step of the supply chain. It is based on a taxpayer’s consumption of goods and services in the economy and essentially raises revenue to finance government spending. It is considered that a good tax system should have a balance between income tax and consumption taxes.
Who should register for VAT?
Even though VAT has been around for almost 30 years, small business owners can still find themselves unsure of how VAT works. Basically, anyone who carries on a business may register for VAT. This includes individuals, partnerships, trust funds, foreign donor funded projects and municipalities. In order to register, an application form from the South African Revenue Services (SARS) must be completed and a specific process followed.
If your business has made taxable supplies (turnover) to the value of R1 million or more during a consecutive 12-month period, then it is mandatory to register for VAT. You are now termed a Vendor.
If your taxable supplies (turnover) are valued at more than R50 000 over a 12-month period, then you may register voluntarily for VAT.
When it comes to submitting returns and/or making payments, this is done in accordance with the tax period that is allocated to the vendor. The VAT returns and payments are usually submitted on or before the 25th day after the end of the tax period.
What you can and can’t claim from VAT
VAT must be charged for all services and/or products supplied by the vendor and these must be, in some way or another, used for consumption during the making of the supplies or providing the service that is taxable. This VAT that is incurred on goods and services used by the business is called Input VAT.
VAT doesn’t apply to everything and certain supplies/services are exempt from the list. This includes financial services, postal services, health and education.
VAT is not recoverable on any goods and/or services that are purely for private use. An example of this is business entertainment expenditure which includes taking customers out for food, to events or providing them with hotel accommodation.
Should the circumstance have a mixed business and private/non-business purpose, then the related VAT should be apportioned and only the business element may be claimed. This could apply to staff parties, outings or team building.
VAT can be tricky to grasp at first but it’s all about understanding the requirements. If you are unsure of any VAT related matters, please contact us at firstname.lastname@example.org and we will gladly assist.