Value Added Tax (VAT)
VAT is payable on:
- supplies of goods and services;
- importation of goods;
- importation of certain services
Vendor registration is:
- Compulsory for businesses with taxable turnover of more than R1 m (R300 000 prior to 1 March 2009) for any 12 month period.
- Voluntary for other businesses where taxable turnover is above R50 000 (R20 000 prior to 1 March 2010) for any 12 month period.
A vendor may apply to be deregistered for VAT where the business’s total value of taxable supplies will not exceed the VAT threshold (whether compulsory or voluntary) as mentioned above. Vendors wishing to deregister for VAT must be mindful of the required output tax payable in relation to any business assets and unpaid creditors on hand at the time of deregistration where an input tax deduction had/would have been allowed.
Calculation of tax
- Charge VAT (output tax) on supplies made by them; and
- May claim VAT paid (input tax) on certain supplies made to them.
The excess of output tax over input tax is paid to SARS.
Prohibited input tax
Input tax deductions may only be claimed insofar as the goods or services are acquired for the purposes of consumption, use or supply in the course of making taxable supplies. Where goods are acquired for private purposes or for purposes of making exempt supplies, input tax may not be claimed. Other requirements to be met by the vendor to make an input tax deduction are:
- VAT at the standard rate must have been charged by the supplier; and
- The vendor must have a valid tax invoice in his possession (note that special rules apply in respect of second-hand goods)
In addition, no input tax may be claimed on:
- Motor cars
- Social or recreational club subscriptions
Requirements for a valid tax invoice
All tax invoices issued with VAT at the standard rate must be done so in South African Rands (a foreign currency may also be used in conjunction with the ZAR values). Zero-rated tax invoices may be issued in any currency.
|Consideration of R3000 or more
(full tax invoice)
|Consideration of less than R3000
(abridged tax invoice)
Supplies fall into two categories:
- Taxable supplies (standard rated and zero-rated); and
- Exempt supplies
Standard rated supplies are taxed at the rate of 14%.
Zero-rated supplies of goods and services are subject to VAT at the rate of zero percent. Vendors who make zero rated supplies may recover related input tax unless it is specifically prohibited. The application of the zero rate to any transaction must be supported by documentation acceptable to SARS.
Zero-rated supplies include:
- goods let for use outside South Africa;
- going concern sales;
- international transport of goods and/or passengers;
- services relating to foreign land;
- processing and repairing imported goods which are to be re-exported;
- services rendered physically outside South Africa;
- certain services rendered to non-residents;
- the sale of maize meal, bread, milk, fresh fruit and vegetables, rice, vegetable oil, eggs, legumes and certain other specified basic foodstuffs;
- certain gold coins, including Kruger Rands;
- gold supplied to the SA Reserve Bank, SA Mint or to any registered bank.
Methods for calculating VAT
There are two bases for calculating VAT, i.e. the invoice basis or payments basis.
The payments basis is only permissible if:
- the vendor is a public authority, water board, regional electricity distributor, municipal entity, municipality or association not for gain (as defined);
- the vendor is a natural person whose taxable turnover do not exceed R2.5 million per annum.
Output tax is due in the earlier of the tax period in which an invoice is issued or payment (other than a deposit) has been received, unless specific rules apply.
Input tax may be claimed only once a tax invoice is received from the supplier. Input tax may be claimed for a period of up to 5 years from the period in which the vendor was first entitled to claim the amount.
Output tax is due as and when payments are received. Input tax may only be claimed as and when payments are made towards the expense and only to the extent that the tax invoice is held at the time the return is submitted. Notwithstanding the fact that a person is registered on the payments basis, a single supply (excluding fixed property) exceeding R100 000 must be accounted for on the invoice basis.
Change of accounting basis
A person may apply in writing to SARS to change from one accounting basis to the other.
Such change normally results in an output tax or input tax adjustment to be made, depending on certain circumstances surrounding a person’s debtors and creditors. A list of debtors and creditors as at the date of change is therefore necessary in order to account for the adjustment.
Supplies to connected parties
Should a supply be made to a connected party who is not entitled to claim a full input tax deduction, that supply will be deemed to have been made at the open market value and output tax must be declared by the supplier on the open market value.
Exempt supplies are supplies that are not subject to VAT. Therefore, no output tax is levied on these supplies. Also, no input tax deductions may be claimed in respect of any expenses incurred for the purposes of making exempt supplies.
Where goods or services are acquired for the purposes of making both taxable and exempt supplies (i.e. mixed supplies), only the portion of the input tax that relates to taxable supplies can be claimed. Where it is impossible to directly attribute the input tax either to taxable or exempt supplies, the extent of the input tax claimable must be calculated according to an apportionment percentage calculated by using the turnover based method (the only method pre-approved by the Commissioner) or another method that is approved by SARS. However, where the taxable use of the expense is greater than 95%, the whole input tax deduction may be claimed).
Exempt supplies include:
- financial services (as defined), unless it is zero rated;
- supply of residential accommodation in a dwelling;
- supply of foreign land;
- sales by an association not for gain of donated goods and services;
- educational services;
- local passenger transport by road or rail;
- trade union membership fees;
- service of caring for children by a crèche or after-school care centre.
Categories of taxpayer
|A||Vendors whose tax periods are periods of two months ending on the last day of the|
|months of January, March, May, July, September and November of the calendar year.|
|B||Vendors whose tax periods are periods of two months ending on the last day of the|
|months of February, April, June, August, October and December of the calendar year.|
|C||Vendors whose tax periods are periods of one month ending on the last day of each of the|
|12 months of the calendar year, because annual turnover exceeds R30 million|
|or the vendor has been approved by SARS to submit monthly.|
|D||Vendors whose tax periods are periods of six months ending on the last day of February|
|and August of the calendar year or, where any vendor falling within this category makes|
|written application therefore, on the last day of such other months as the Commissioner.|
|E||Vendors whose tax periods are periods of 12 months ending on the last day of their ‘year|
|of assessment’ as defined in Section 1 of the Income Tax Act or where any vendor falling|
|F||Vendors whose tax periods are periods of four months ending on the last day of June,|
|October and February of the calendar year.|
- Vendors falling within categories A and B must furnish returns every second month, category C vendors furnish their returns monthly while category D vendors furnish returns every six months.
- In circumstances where a particular company in a group provides intra-group services to other companies that are registered for VAT, e.g. management or administration services, or the letting of property, and such consideration is the sole income of the company, then the company may register under category E.
- Category E allows for a tax period of 12 months ending on the last day of the tax year. It could end on any other date if written approval is obtained from SARS.
- In order to qualify under category E, the following requirements must be met:
- the vendor must be a company or a trust.
- its enterprise must consist solely of one or more of the activities of letting of property, renting of movable goods or administration or management services, and these activities must be for companies which are connected persons in relation to the vendor.
- the recipients of the supplies must all be registered vendors and entitled to full input tax deductions, i.e. not be partially exempt.
- the tax invoices must be issued only once per year and the payments for the supplies must, by agreement between the parties, only become due once a year at the end of the tax year.
- the vendor must apply in writing to SARS to be placed in category E, and approval must be obtained.
- The vendor may be re-categorised back into category A, B, C, or D if it applies therefore, or SARS is satisfied that it should be changed by reason of a change in circumstances or being placed in category E results in financial loss (including loss of interest) to the State.
- Category F was introduced to accommodate small businesses and allows them to submit only three VAT returns per annum.
- In order to qualify for category F, the following requirements must be met:
- The value of taxable supplies of the vendor must, in the prior period of 12 months ending on the last day of any month, not exceed R1.5 million.
- The vendor must apply in writing to SARS to be placed in category F, and approval must be obtained
End of tax period
A tax period normally ends on the last day of the month but the vendor may choose to end it on any other fixed day which is within 10 days of the last day of that month. In order to end the tax period on a specific date, e.g. the 25th of the month or a specific day, e.g. the last Friday of the month, the vendor must apply to the Commissioner for approval as per Interpretation Note No 52 (issued 14 December 2009).
Sale of business as a going concern
Persons wishing to buy or sell a business as a going concern must bear in mind the requirements set out in section 11(1)(e) of the VAT Act read in conjunction with Interpretation Note 57 (issued 31 March 2010). This states as follows:
- both the seller and buyer must be VAT registered; and
- the sale agreement must provide that the business is disposed of as a going concern and that VAT is payable at the zero rate; and
- that the business will be an income-earning activity on the date of transfer; and
- all the assets necessary to carry on the enterprise must be transferred from the seller to the purchaser.
Submission of VAT returns
The VAT return and payment must be submitted by no later than the 25th day of the month following the end of the tax period. For example, if a tax period ends on 30 April, the VAT return must be submitted by 25 May. If the 25th falls on a Saturday, Sunday or public holiday, the VAT return must be submitted on the prior business day. If the VAT return is submitted and payment made by electronic filing (e-filing), the return may be submitted and the payment may be made on the last business day of the month following the end of the tax period. Note however that where returns are filed through e-filing but payment is made by cheque, payment must still reach SARS by the 25th or last business day before the 25th.
Interest and penalties on late payment of VAT
Penalties and interest are charged to vendors on late payment of tax.
- A penalty of is 10% imposed if VAT is paid after the due date.
- Interest is imposed at the prescribed rate with effect from the first day of the month following the month in which the payment became due.
Interest paid to vendors
If a VAT refund is not effected within 21 business days of the return being rendered, interest at is payable to the vendor. The vendor must however apply for the interest to be paid to him.
Refer to the section on useful interest rates for an indication of the applicable interest rates.
* With effect from 1 April 2003 the interest payable to SARS on late payment or underpayment of VAT by the taxpayer is identical to the interest rate in respect of outstanding income tax, as set out in 2 – 16
SARS may levy additional tax of up to 200% in those cases where a vendor has intentionally not complied with its obligations. Criminal prosecution can also be instituted.
VAT on fringe benefits
Output tax is payable by a vendor in respect of fringe benefits to employees.
Fringe benefits are defined within Section 1 of the Income Tax Act read in conjunction with the Seventh Schedule of that Act. Fringe Benefits that will generally be subject to VAT are the following:
- Assets acquired by an employee directly or indirectly from his employer, either for a nil consideration or for a consideration below market value.
- The right of use of any asset or of any service made available by the employer to the employee for private or domestic purposes, either free of charge or for a nominal consideration.
Specific valuation rules apply when the right of use applies to a company car:
- When the company car is a passenger vehicle (including a station wagon, minibus and double-cab light delivery vehicle) and the vendor was denied an input tax deduction on its acquisition, the value of the benefit is calculated according to the following formula:
- - 0,3% x the determined value of the vehicle (for fringe benefits tax purposes) for the month or part of the month.
- If the company car does not constitute a motor car as defined, e.g. a pick-up truck, the formula to be applied changes to:
- 0,6% x the determined value of the vehicle for each month or part of the month.
The following fringe benefits escape VAT:
- The supply of either exempt or zero rated goods and services, e.g. low interest loans, residential accommodation, international air tickets, or the payment of employee debts.
- Any cash allowances, for example, a motor car allowance.
- The supply of entertainment to employees, e.g. meals.
- Any benefits granted by the employer in the course of making exempt supplies.
- Supplies of goods where an input tax deduction was denied for the employer on acquisition
- For example, where a company car is sold to an employee at less than market value, no VAT liability arises since the employer was denied an input tax credit on its acquisition.