Understanding Value Added Tax: It’s Not Your Money!

Understanding VAT is crucial for businesses, and compliance is key to avoiding penalties. Always ensure your VAT returns are submitted on time and that your records are accurate.

Q: What is VAT and when was it introduced?
A: VAT (Value-Added Tax) was introduced in South Africa on 29 September 1991. It is a tax levied on the value of all standard-rated taxable supplies of goods or services made by a vendor in the country. Initially, the VAT rate was 14%, but since 31 March 2018, it has been increased to 15%.

Q: How does VAT work in South Africa?
A: VAT is considered an indirect tax. This means that SARS (the South African Revenue Service) does not collect this tax directly from the consumer. Instead, the vendor (the business selling goods or services) collects the VAT from the consumer on behalf of SARS. The vendor then pays this collected VAT to SARS, after deducting any allowable input VAT.

Q: What is the formula to calculate VAT payable to SARS?
A: The vendor calculates the VAT payable to SARS using the following formula: Output VAT (VAT collected on sales)
MINUS
– Input VAT (VAT paid on purchases)
EQUALS
= VAT payable/refundable

If the output VAT (collected from sales) exceeds the input VAT (paid on purchases), the vendor must pay the difference to SARS. If input VAT exceeds output VAT, then SARS owes the vendor a refund. SARS has the right to verify your claim!

Q: What are the different types of supplies covered under VAT?
A: The VAT Act categorizes supplies into three types:

1. Standard-rated supplies: These are taxed at the standard rate of 15%.
2. Zero-rated supplies: These are taxed at a 0% VAT rate.
3. Exempt supplies: These supplies are not subject to VAT at all.

Q: Can input VAT be claimed on all purchases?
A: Input VAT can be claimed on all goods and services that are used to make taxable supplies, whether standard-rated (15%) or zero-rated (0%). However, input VAT cannot be claimed on goods and services used to make exempt supplies.

Q: Who can claim input VAT?
A: Only VAT vendors can claim input VAT. If a business is a non-VAT vendor (meaning they are not registered for VAT), they cannot claim input VAT on their purchases. For them, the chain of VAT claims ends.

Q: How do vendors report VAT to SARS?
A: Vendors report their VAT to SARS through a VAT201 return at the end of each tax period. This return details the input VAT incurred, and the output VAT collected during that period. The vendor must submit this return and pay the balance of VAT due by no later than the 25th day after the tax period ends if submitting manually or by the last business day of the month if submitting via SARS e-Filing.

Q: What happens if my VAT inputs exceed my VAT outputs?
A: If your input VAT exceeds your output VAT, SARS will refund the difference to you. This typically happens if your business incurs more VAT on purchases than it collects on sales, for example, during a period of high investment in capital goods.

Q: What is the biggest misconception about VAT?

A: One of the most common misconceptions among vendors is that VAT is their money. Some think of it as extra income, but this is incorrect. When you charge VAT, you are essentially acting as an agent for the state. The extra 15% you add to your normal price isn’t yours—it belongs to the government.

Q: Can you explain this in simple terms?

A: Imagine you run a business and sell a product for R100. To comply with VAT rules, you charge an additional 15%, making the total R115. That extra R15 is not your money—it’s money you’re collecting on behalf of SARS. Your income remains R100. The R15 needs to be paid over to SARS because you are acting as a VAT collection agent for the government.

Q: So, why can’t I keep the VAT money?

Because it doesn’t belong to you! You’re essentially holding it in trust for SARS. Failing to pay it over when it’s due is illegal and can result in penalties. The VAT you collect must be handed over to SARS, usually at the end of each tax period, which can be monthly, every two months, or every six months, depending on your business.

Q: How can I make sure I’m prepared for my VAT return?

A: To avoid issues, you need to plan from the beginning.

Here is how:

Separate the VAT collected: From the moment you charge VAT, treat it as something you owe. Some businesses open a separate bank account just for VAT so they don’t accidentally use it for other expenses.

Track your sales and expenses: Make sure you’re keeping detailed records of your sales (output VAT) and your purchases (input VAT). This will make calculating what you owe much easier.

Budget for your VAT payment: Always remember that when VAT return time comes around, you’ll need to pay SARS what you owe. Set aside that money so it’s ready to go.

Submit on time: Late submissions can result in penalties and interest charges, so mark your calendar for the VAT return due dates.

Q: What should I do if I’ve used the VAT money for other expenses?

A: This is a tricky situation because you’re still responsible for paying that VAT to SARS. If you find yourself short, you may need to use business funds or even secure a loan to cover the VAT payment. It’s important to get back on track and ensure that you don’t make the same mistake in future periods. Always keep the VAT money separate and remember—it’s not yours to spend!

By understanding your role as an agent for the state, you can avoid the common mistake of thinking VAT is part of your income. Stay organised, keep that money separate, and you’ll have no trouble when VAT return time rolls around!

Conclusion

At The Tax Shop Polokwane West (Pty) Ltd, we specialise in handling your bookkeeping and VAT returns with precision and care. Don’t let VAT catch you off-guard—keeping track of it can be complex and time-consuming. Let us take the burden off your shoulders so you can focus on what matters most: running your business.

Reach out to us today, and we’ll ensure your VAT returns are handled smoothly, accurately, and on time. We’re here to Make Your Life Easier!

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