‘Render unto Caesar the things that are Caesar's’ – so, what about registering for VAT?
Whether to register as a VAT vendor or not is a difficult decision for start ups and smaller businesses. There are many complicated rules and regulations around VAT which makes it tricky to manage on your own. It is really a good idea to talk to your bookkeeper about the implications of registering your business for VAT or not.
WHAT IS VAT?
Value Added Tax (VAT) is a consumption tax. This is a fee levied on the supply of goods and services by vendors who are registered as VAT vendors. Actually, when you register as a VAT vendor you essentially become a tax collection agent for the South African Revenue Services (SARS). You collect VAT for SARS which you then pay over to them. Since 1 April 2018 all goods and services have been levied at 15%.
If you are registered for VAT, you have to add 15% VAT to the selling price of your goods, product or services. If you sell a chicken for R100, you need to add R15 on to the price. Your customer has to pay you R115, R100 is yours to keep, but then you in turn will have to return R15 to SARS when you do your monthly VAT return. This is called output tax.
You can also claim VAT back from SARS. This claim will be all the VAT amounts you paid on all the goods and services you have purchased. If you have bought a bag of laying pellets for your egg production business, you will have had to pay 15% VAT at the till. If you are registered as a VAT vendor, you may submit the relevant tax invoice and claim that 15% back. VAT levied on goods you purchased is called input vat.
To calculate the VAT that you either have to 1) pay over to SARS, or 2) claim back from SARS, you deduct input vat from output vat:
- If your output VAT is greater than the input VAT, then you must pay SARS.
- If your output VAT is less than the input VAT, you can claim back from SARS.
WHO SHOULD REGISTER FOR VAT?
For businesses with a turnover of under R1 million per year, registration for VAT is optional i.e. you don’t have to register as a VAT vendor, but you may do so if you want to. If your business turnover is more than R1 million per annum, you have no option but to register as a VAT vendor.
DISADVANTAGES TO REGISTERING FOR VAT
You will have to spend a lot of time on precise filing and administration.
- VAT returns have to be submitted regularly, usually every two months.
- If you don’t register as a VAT vendor, you may avoid the cashflow challenges that paying VAT can cause.
- VAT is paid per invoice. You have to ensure the details on every tax invoice provide your name, address and VAT number otherwise it is not valid to claim for VAT on that invoice.
- If you have issued a large invoice in a certain two-month period, you will have to pay the VAT that was included on that invoice to SARS – whether you have received the payment due on that invoice yet or not. This has cashflow implications and causes problems for small businesses – and then the problem is made worse when your debtors (who owe you the money) don’t pay you timeously – or at all. You may end up writing off that debt and then having to go to the trouble of trying to recover that VAT money from SARS.
- If you don’t have to charge VAT on every invoice you issue, you can afford to be more competitive by setting the prices for your goods being sold a little lower than you would otherwise.
ADVANTAGES TO REGISTERINGAS A VAT VENDOR
- When your business is registered as a VAT vendor it creates the impression that you are a serious business and conduct your business affairs in a professional manner.
- If you have a capital-intensive business your cashflow can take a lot of strain if you are not a VAT vendor because you can never claim the VAT you’ve paid, back.
- Anything you purchase to produce goods in your business, will automatically cost you 15% more because you will never recover the VAT on that purchased product. For example, if you buy a machine for R10 000 it will cost you an additional R1 500, which is only recoverable if you are registered as a VAT vendor and can put in a claim to get that VAT paid back via SARS.
THERE ARE ALWAYS EXCEPTIONS TO THE RULES: GET ACQUAINTED
It is true that there are instances where you do not have to charge your client any VAT and in other circumstances you can’t claim VAT on an expense.
VAT is divided into three different categories namely:
- Standard rate: VAT is levied at 15%.
- Zero-rate: VAT is 0%.
- VAT exempted: No VAT is levied on certain items.
You really need to get advice from experts to know which transactions are zero-rated or VAT exempt.
Some examples of zero-rated VAT items are:
- Basic food items like milk, brown bread, maize meal, samp, eggs, vegetables, fruit etc. There are currently 19 zero rated food items.
- Petrol and diesel.
- Animal feed and animal medicine.
- Fertiliser, pesticide and seeds used for cultivation.
- Sale of a going concern.
- Export goods.
Some examples of VAT exempted goods/services are:
- Rental accommodation for residential purposes.
- Public road and rail transport services.
- Educational services.
- No VAT on interest charged for financial services.
You can only claim VAT back on your expenses that are business related – if you have a supplier invoice – and not expenses incurred personally, for example, entertainment – even if you bought refreshments for staff or held a business event. Cell phone usage, travel for business, ESKOM – these claims all need to be calculated and shared between business and personal expenses in order to lodge a valid VAT claim. It is easily calculated with the help of an experienced bookkeeper. You can register for VAT on e-filing, but it really is worth finding out the best option for your business by learning more about being a VAT vendor with the guidance from an expert.
Publication: August 2020