Staying on top of your personal taxes is one thing. For a business owner, things get a bit trickier. But like anything, the more you know, the easier it is to manage.
What is VAT, exactly?
Does it apply to all my products and services? Do I need a professional to help me or can I handle it on my own?
We got in touch with Patrick Knight, an expert from TaxTim, to shed light on this murky world. Here’s everything you need to know about Value-added tax and how it affects your business.
What is VAT?
Value-added tax (VAT) is a consumption tax placed on goods and services. The government requires certain businesses to charge VAT on taxable supplies – and at every stage of the supply chain – in order to produce these items. VAT is charged at the starting point of production until the point of sale.
Does VAT apply to all products?
VAT applies to certain businesses, but it’s compulsory for a business owner to register for VAT if their turnover amounts to more than R1 million for a consecutive 12-month period.
A business may choose to voluntarily register for VAT if their turnover exceeds R50 000 for a period of 12 consecutive months.
For certain companies or where income earned is zero-rated VAT is charged at 0% and not 15%, but the company would still need to register for VAT.
How much is VAT?
As previously mentioned, VAT is charged at every step in the production and distribution process. It’s proportional to the final price charged for the goods or service.
As of 1 April 2018, VAT increased to 15%. When goods and services are imported, VAT is collected by customs. A select few goods and services are zero-rated and some of them are even exempt from VAT.
What are zero-rated goods and services?
The government doesn’t tax the sale, but allows for VAT to be collected at certain points of the process of production. Zero-rated goods and services include exports, 19 basic food items, illuminating paraffin, goods that are subject to the fuel levy (including petrol and diesel), international transport services, farming inputs, sales of going concerns and certain grants by government.
Goods and services that are exempt from VAT include non-fee related financial services, educational services provided by an approved educational institute, residential rental accommodation, as well as public road and rail transport.
Can you give an example of how VAT is calculated?
Let’s say you’re a vendor – someone who is obliged to register for VAT – and you’re selling pens. You purchased them for R2 (excluding VAT) each and you decide to sell them for R3 each. You’ve added R1 value to the pen.
The VAT collected by SARS will be on the R1 you’ve added. When you sell the pencil for R3, you add VAT (15%) of R1, totalling 45c. This 45c is meant to be paid to SARS. This is known as Output VAT.
You’ll be able to claim the 15% on the R2 you paid for the pen. So even though you pay SARS 45c, you’re able to claim back the Input VAT of 30c. That means the net result is a payment to SARS of 15c, which is what you’ve effectively charged the customer on the R1 profit you make.
Do I need to register for VAT?
Any person, individual, company, foreign donor funded project, municipality, trust fund and partnership that carries on a business may register for VAT.
You may apply as a vendor if the nature of your business includes regular activities in the following industries:
– Agriculture, Farming, Forestry and Fisheries
– Ship and aircraft building
– Manufacturing or assembly of plant, machinery, motor vehicles or locomotives
– Property development
– Infrastructure development
– Beneficiation (i.e. the treatment of raw materials such as iron ore)
Do I need to hire a professional to help me with this or can I do this on my own?
You can register on your own, but you may hire a registered tax practitioner to handle your VAT registration. Some business owners find this to be a much more convenient solution.
How do I register for VAT?
In order to register for VAT, complete the VAT 101 application form available on SARS eFiling on your company profile. SARS will then ask you to come in for an interview with supporting documents to prove your registration.
If it’s compulsory for you to register for VAT – meaning that you are earning R1 million or more in a 12-month period – then the form needs to be submitted to SARS within 21 days from the date that you exceed the R1 million mark.
The document needs to be submitted in person, but your tax practitioner may appear on your behalf, as long as they are in possession of all the supporting documents.
SARS will not accept applications that are photocopied or faxed. They only accept applications via post in the case where the applicant is geographically out of reach or in the case of disability.
Do I need to register if I am a sole proprietor and have more than R1m in turnover?
Yes. Once registered for VAT, you’re required to:
- Include VAT in all prices advertised or quoted
- Charge and collect VAT
- File your returns and payments on time
- Issue your tax invoices for the supplies made
- Keep track of records for the supplies made and received.
What penalties could I incur if I choose to ignore this?
If you’re liable to register for VAT but you choose to ignore this, you’ll be liable to pay VAT of 15% on all of the prices that you have charged, regardless of whether or not VAT was charged by you. SARS will charge you from the date that you should have registered.
Additionally, penalties and interest could be added. These penalties could include:
- 10% penalty of the amount that should have been paid
- The prescribed interest rate on the total amount of VAT that was not paid
- An understatement penalty
How do I file my business’s tax returns if I’m VAT registered?
Obtain an ITR14 form from SARS. This can only be requested and submitted through SARS’ eFiling system. In order to file your business’s tax returns, you’ll need your business’s SIC (Standard Industrial Classification) code.
What claims can I make if I charge VAT?
You would be able to claim the VAT you paid on most inputs and expenses you incurred in earning the income from the items or services that you charge VAT on.
How do I submit a VAT return?
The VAT 201 return is a declaration that needs to be made at the end of every tax period. This declaration reflects the VAT that you’ve charged, or for which you are liable to declare as output tax. It also includes the amount that you’re entitled to deduct as input tax.
You can file your VAT returns through SARS’ eFiling system. To do this, you have to be a registered eFiler. VAT must be paid by no later than the last business day of the month after the end of the tax period.
You can also file non-electronically at the SARS branch closest to you. VAT must be paid by no later than the 25th day after the end of the tax period.
In most cases, VAT returns need to be completed every two months in order to prove that VAT has been collected and that input VAT has been incurred.
If you don’t receive your VAT refund within 21 business days after submitting your VAT201 return, SARS will pay you interest at the prescribed rate. It would be best to hold SARS accountable to the deadlines that they provide you with.
And there you have it.
If you need professional help with filing your tax returns, TaxTim is a great solution. They’re local, friendly and they make the process easy. Plus everything is handled through their website.
Let us know if you have any more questions about tax and how it affects your business. We’ve got your back and we’re always happy to help.