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5 VAT mistakes made by small business

•360 | CHARTERIS & BARNES | The Core Group – Newsletter

Value-Added Tax (“VAT”) compliance is of crucial importance for small business, as non-compliance will result in penalties and interest being levied by SARS. Remember that penalties and interest levied by SARS will not qualify as an income tax deduction for such small businesses. Here are some of the VAT mistakes made by small businesses that might result in penalties and interest being levied by SARS:

In terms of section 23 of the VAT Act, one of the instances, when a person must register for VAT, is at the beginning of the month following the month where the taxable supplies made of the business exceeded R1million for the previously 12 months. Non-registration of VAT would result in the person still being regarded as a VAT vendor in terms of the definition of a vendor in section 1 of the VAT Act. As such, even though not registered for VAT, once the compulsory VAT registration threshold has been exceeded, the small business would still be liable to account for the 15% VAT on all the supplies made even though the VAT has not been charged to the customers.

In terms of section 17(2) of the VAT Act, no input VAT deduction can be claimed on the acquisition of a motor car by means of a purchase, instalment sale or lease including the hiring of a motor car from a car rental company. A motor car is defined in section 1 of the VAT Act, and generally includes passenger motor vehicles (including a double-cab light delivery vehicle). As such the VAT incurred on a tax invoice from a car rental company relating to the rental of a passenger motor car cannot be claimed as an input VAT deduction even though the purpose of the car rental is 100% business related. Claiming of such input could result in understatement penalties being levied by SARS up to 200% of the VAT in question.

Some small businesses are under the wrong impression that the late payment of VAT if it is only a day or two after the deadline, would not result in any punitive consequences. This is not correct and such late payment would result in negative financial consequences for the small business. In terms of section 39 of the VAT Act, a 10% percentage non-compliance penalty is levied on the late payment of VAT. This would apply even if the payment is only a few hours late!

The criteria for the remission of these penalties are very strict and would only apply in exceptional circumstances. As such small businesses should avoid the late payment of its VAT amounts owed to SARS at all cost.

In terms of section 17(2), an input VAT deduction cannot be claimed on VAT incurred on entertainment as defined in section 1 of the VAT Act. The input VAT would be denied to the extent that goods or services are for the purpose of entertainment. As such the limitation of claiming the input VAT deduction on entertainment is not just limited to for example the cost incurred on entertaining a client in a restaurant. The prohibition also extends to goods acquired for the purpose of entertainment such as items acquired for entertaining staff, for example, the microwave, kettle and fridge in the office or even fixed property acquired for the purpose of entertaining clients.

To claim a VAT input deduction in terms of section 16 of the VAT per the definition of “input tax” as defined in section 1 of the VAT Act, a small business must be in possession of a valid tax invoice in terms of the requirements listed in section 20(4) of the VAT Act (assuming the vendor is registered on the invoice basis). A vendor has five years to claim an input VAT deduction. Therefore, even though the expense including the VAT portion has been incurred in a VAT period, no input VAT deduction can be claimed until the small business is in possession of a valid tax invoice.

Over the last few years there have been a number of instances where small businesses claimed input VAT deductions without being in possession of the tax invoice yet, and then when SARS disallow such input VAT deduction, only then did the small business obtain the tax invoice and produced it to SARS. SARS then, correctly in terms of the VAT Act, still disallows the input VAT deduction for that VAT period, and in most instances then also levies penalties and interest. Although the small business can then claim the input VAT deduction in a later VAT period, they will still be out of pocket with the penalties and interest levied by SARS.