A small business can easily be saddled with outstanding VAT debt of R1m or more if a registered vendor fails to manage VAT carefully or in a circumspect way.
How the VAT System Is Meant to Work
There must be a balance between the VAT paid on taxable supplies, known as output VAT, and the VAT paid on services done or goods received, known as input VAT, for the system to work effectively. If limited input VAT is claimed by the vendor on supplies delivered to the business, the output VAT liability increases.
If there is limited scope to claim input VAT, it does not make sense to register for VAT. For example, it may not be beneficial for a short-term insurance agent to register due to the limited scope for input claims.
Yet many larger insurance companies require insurance agents to register for VAT, so that smaller insurance companies are hesitant to drop out of the VAT system, despite the liabilities.
The Registration Threshold Problem
SARS has been aware of the crippling effect on small businesses for years, but only recently increased the VAT registration threshold from R1m to R2.3m. Many companies are now attempting to deregister from VAT, but additional liabilities may occur as exit VAT is applicable on all assets held by the company.
Where the Liability Actually Comes From
The VAT 201 return comprises only two pages and is on average payable every two months. Yet those two pages mask a very technical and complicated tax calculation.
- In many cases vendors themselves are responsible for liabilities as an effective paper trail is often not followed. And returns are at times submitted late, with a 10% penalty immediately becoming payable.
- But SARS can also not escape blame as vendors are often incorrectly registered due to the definition of a principal and agent not being adhered to. S54 of the VAT Act clearly states that only the principal may charge VAT, not the agent engaged by the principal.
- Yet in many cases larger companies in the communications and retail sectors hold agents liable for VAT, while at the same time claiming output and input as principals. Smaller companies have limited resources to take on the larger companies. The result being double taxation to the disadvantage of the smaller companies.
When Even the Courts Disagree
VAT can also become very technical with confusion about what constitutes a taxable or an exempt supply even evident in higher court judgments. The recent Capitec case being a good example, with output claims of R700m by the banking group overturned on a revised view of what constitutes an exempt supply.
This article is general information about South African tax and is not tax advice. Tax outcomes depend on the specific facts of each matter. See our Website Terms of Use for more.
Carrying VAT debt, or unsure if you should be registered?
Whether it’s managing input and output VAT properly or deciding if deregistration makes sense for your business, this is exactly the kind of question worth getting right early.