"Let's start at the very beginning – A very good place to start" are the words sung in the seminal children's movie 'The Sound of Music'.
Recent discussions with individuals in various business areas have highlighted a lack of understanding of the basic concepts and principles of value-added tax ("VAT"). The principle of 'starting at the very beginning' is thus an important principle in that it is often a lack of understanding of these basic principles which leads to an inaccurate understanding of the more complex areas of VAT. This article is the first of a two part series that therefore aims to provide a brief and basic outline of some of the more founding principles of VAT as well as to enter into brief discussions specific to certain overlooked areas of VAT.
What is VAT
VAT is a tax added to the cost of a product or service and is levied for purposes of generating revenue for government. VAT is often referred to as a tax on consumption of goods or services, and is levied on the supply by a vendor of goods or services in the course and furtherance of any enterprise carried on by a vendor.
The key definitions underlying VAT are contained in section 1 of the Value-Added Tax Act 89 of 1991 (the "Act").
Before a person can register as a VAT vendor, the person has to carry on an 'enterprise' as defined in the Act. An enterprise is defined as any activity carried on continuously or regularly in the Republic or partly in the Republic, in the course and furtherance of which goods and services are supplied to any other person for a consideration, whether or not for profit. The definition contains certain specific inclusions and exclusions, the most notable exclusions being services rendered by an employee to an employer; the private or recreational pursuit of hobbies and VAT exempt activities (discussed below).
Inputs and outputs
The terms 'input tax' and 'output tax' are defined in section 1 of the Act. Put most simply however, input tax is the tax that a vendor may claim back as a deduction from SARS, and output tax is the tax that a vendor levies on the supply of goods and services and which such vendor then pays over to SARS.
Input tax is defined as the VAT incurred on the supply of goods or services to the vendor; VAT incurred on the importation of goods; and VAT on excise duty. Also included in the definition of input tax is, inter alia, the deemed input tax deduction on the acquisition of second-hand goods. Input tax is only deductible to the extent that it is incurred for the purpose of consumption, use or supply, in the course of making taxable supplies. The Act also contains a section dealing with non-deductible input tax, the most relevant being that input tax may generally not be deducted to the extent that it has been incurred for the purpose of entertainment. It should be noted that there are, however, certain exceptions applicable to this general prohibition. An input tax deduction may be claimed for a period of 5 years from the date of the tax invoice received.
Output tax in relation to a vendor, is defined as the tax charged in respect of the supply of goods or services by the vendor. The tax charged is collected from the recipient of such goods or services by the vendor and is required to be paid over to SARS, even though the customer may not yet have paid for the goods or services.
The difference between the amounts of output tax attributable to a tax period, and the deductible input tax not previously claimed by a vendor, represents the tax payable or refundable to SARS. To the extent that the output tax exceeds the allowable input tax deductions, a VAT payment will be due to SARS. Where a vendor's permissible input tax deductions, exceeds the amount of output tax for a tax period, a VAT refund may be claimed from SARS. A vendor is required to retain a valid tax invoice as proof of any input tax deductions which are made. These tax invoices as well as other records of transactions must be retained for a period of at least 5 years.
Supplies (standard rated / zero-rated / exempt)
For VAT purposes all supplies are treated as either being a standard rated supply, a zero-rated supply or an exempt supply. Supplies that are standard rated or zero-rated are considered to be 'taxable supplies' as defined.
Standard rated supplies are supplies that are subject to VAT at the prescribed rate of 14%. The supply of goods and services are generally subject to VAT at the standard rate, unless such supply is specifically zero-rated or exempt in terms of the Act. Vendors making standard rated supplies are required to levy output tax at the prescribed rate on the value of the supply which must then be paid over to SARS. Such vendor may claim its input tax deductions on goods or services acquired in the course of making such taxable supplies.
A zero-rated supply is a taxable supply on which VAT is levied at the rate of 0%. Therefore no output tax will be payable to SARS in respect of zero-rated supplies. Section 11 of the Act sets out specific instances of supplies of goods and services that may be zero-rated. Vendors making zero-rated supplies are entitled to claim their input tax deductions on goods or services acquired in the course of making such taxable supplies.
An exempt supply is not a taxable supply. An exempt supply is the supply of goods or services upon which neither VAT at the standard rate or zero-rate is chargeable. Supplies which constitute exempt supplies are specifically provided for in section 12 of the Act. Vendors may not claim an input tax deduction in respect of goods or services acquired in the course of furtherance of making exempt supplies. A person that makes only exempt supplies cannot register as a vendor as such person will not be seen to be carrying on an 'enterprise' as defined.
Where goods and services are purchased for taxable and non-taxable purposes, only a portion of the input tax may be claimed, that is, vendors making mixed supplies (taxable and exempt supplies), are required to apportion their input deduction to the extent to which the vendor has utilised the goods or services in the course and furtherance of making taxable supplies. This will be dealt with in further detail in Part 2 of this article.
Registration as a VAT vendor
Before a person may start levying VAT on its supplies and before it may start claiming input tax deductions from SARS, such person must register as a vendor for VAT purposes. A vendor is defined in the Act as any person who is or is required to be registered under the Act.
The Act requires any person to register as a vendor for purposes in South Africa if it carries on an "enterprise" in South Africa, and the value of taxable income from such enterprise exceeds or is likely to exceed the registration threshold of R1 million for a 12 month period. Such persons are liable for compulsory registration as a vendor.
Persons who do not meet the R1 million registration threshold may apply for voluntary registration where they are able to satisfy the Commissioner that they are continuously and regularly carrying on an activity, which can reasonably be expected to result in taxable supplies being made for a consideration only after a period of time, and where the total value of taxable supplies to be made can reasonably be expected to exceed R50 000 in a period of 12 months.
Persons liable for registration, or who voluntarily elect to register, must complete a form VAT 101 (Application for Registration) and submit it in person to the SARS branch office nearest to the place where such person's business is situated or carried on not later than 21 days from the date of liability. Where it is impractical to submit the application in person, a registered tax practitioner may appear in person on behalf of the applicant.
Persons registering as vendors should bear in mind the duties associated with being a vendor. These include, inter alia, the collection or levying of VAT on taxable transactions, payments of output tax to SARS within the relevant time periods, the issuing of tax invoices, record retention for a period of 5 years and the submission of VAT returns during the relevant tax periods.
The above serves as a basic outline of the starting principles of VAT. In Part 2 of the article, we intend considering in more detail the separate registration of branches and divisions, VAT cycles and accounting basis, VAT apportionment as well as VAT in relation to fringe benefits granted by employers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.