Small Business Law
Value-added tax (VAT)
VAT is paid by each producer or distributor who handles the goods before they reach the consumer or end user, who is usually a member of the public. It is called value-added tax, because tax is paid at every stage where value is added to the product.
VAT was introduced in 1991 and it replaced general sales tax (GST). GST was a tax which was paid only by the end user or consumer.
Example of the difference between VAT and GST: Cozy Cotton is a factory, which weaves cotton into material. It sells the material to Fabulous Furniture, a factory which uses the material to make furniture. Fabulous Furniture sells its furniture to The Family Furniture Shop, which sells a couch to Liziwe. Under the old system of GST, the only person who would pay tax, would be Liziwe, the person buying the furniture from the shop. The person buying the furniture from the shop to use at home is called the end user. Under the new system of VAT, the Cozy Cotton factory would pay tax (VAT) when it buys the cotton; Fabulous Furniture would pay tax when it buys the material; The Family Furniture Shop would pay tax when it buys the furniture, and the end consumer would pay tax. The tax is therefore shared between four parties.
VAT vendors
When a business is registered as a vendor, it means two things:
- The vendor must collect VAT from customers and pay this VAT to the Receiver.
- The vendor can claim back any VAT that is paid on anything bought for the business.
Who should register as a vendor?
If the turnover (the total of all the sales, without subtracting the costs) of a business is more than R300 000 per year, then the business must be registered as a vendor. When you start a business, if you think the turnover will be more than R300 000, then you have to register as a vendor.
If the turnover of the business is less than R300 000 per year, the owner can choose to register or not. It is a lot of work to pay VAT to the Receiver regularly and to keep all the records the Receiver wants a vendor to have. If you don’t have to register, it is only a good idea to register if the business buys lots of things from suppliers and can claim back VAT to reduce the amount of VAT you owe SARS.’
See PROBLEM 3: Is being a VAT vendor worth it?
If the business is a sole trader or a partnership, the owners must register in their own names.
If the business is a CC or a company, the owners must register in the name of the business.
How do you register?
The owner of the business must get a form VAT101 from the Receiver of Revenue. You must fill in the form, and send or deliver it to the Receiver of Revenue. The Receiver will send the owner of the business a registration number.
How does it work?
The Receiver of Revenue will give the business a registration number, which is called a VAT invoice number. This number allows the person or business to charge 14% VAT on goods or services the business sells.
Example: Nomawhethu types letters for other people. She is registered as a vendor. She charges R20 to type one page. She must charge 14% VAT on top of that. 14% of R20 is R2,80. So she charges R20 + R2,80 = R22,80 altogether.
VAT invoices
Vendors must give their customers a VAT invoice, to charge them for the goods or services. The invoice must have the following written on it:
- the words ‘Tax Invoice"
- the VAT registration number of the business
- the amount of VAT paid by the customer separately from the price of the goods or services.
Remember to check that the VAT invoices you receive from other businesses have all these details on them if you are going to claim the VAT back from SARS. If an invoice does not have all these things on it, you cannot claim the VAT back.
What records must be kept
Businesses registered for VAT must keep records, which show how much VAT they have collected. For example these records must be kept:
- invoices from your business to customers
- invoices from your suppliers to you
- a list of debtors (that owe the business money) and creditors (that the business owes money to)
- bank statements, deposit slips, copies of cheques
- books of account, where the owner of the business writes down how much money has come into the business every month, and how much money has been spent and on what
It is a good idea to ask an accountant to help set up books, or to go on a short course which teaches people how to keep books.
Records must be kept for five years.
The owner of the business must also have a bank account.
Paying VAT to the SARS
The owner of the business has to pay the VAT over to the Receiver of Revenue every two months. The Receiver will tell you how your two-month cycle will work. You will be put into category A or category B.
If your return is late, you will have to pay interest and a fine.
You can pay on-line or into the SARS account at First National Bank.
Category A vendors have to pay like this:
- VAT collected from customers from 1 December to 31 January must be paid to the Receiver by 25 February
- VAT collected from 1 February to 31 March must be paid to the Receiver by 25 April
- VAT collected from 1 April to 31 May must be paid to the Receiver by 25 June and so on.
Category B vendors have to pay like this:
- VAT collected from 1 January to 28 February must be paid to the Receiver by 25 March
- VAT collected from 1 March to 30 April must be paid to the Receiver by 25 May
- VAT collected from 1 May to 30 June must be paid to the Receiver by 25 July and so on.
The owner of the business must calculate how much VAT you owe the Receiver. Send the Receiver a cheque with a form called a return. The return is form VAT201. If your returns often get to the Receiver late, the Receiver can tell you to send the VAT every month instead of every two months.
Businesses have to pay VAT on goods or services if they have invoiced customers. This is called paying VAT on an invoice basis. It means that if the owner of the business invoices customers, the owner has to pay over the VAT to the Receiver even if the customer has not yet paid. This could cause cash flow problems for the business.
The owner of the business can do three things:
- Apply to the Receiver in writing to pay VAT on a payments basis. This means that you only pay VAT to the Receiver when your customers have paid.
- Ask customers to pay their account immediately when they buy the goods or when they receive the service.
- Charge customers interest if they do not pay your invoices within 30 days.
Claiming input credits
The vendor can claim back any VAT that is paid on anything bought for the business. The VAT which the vendor can claim back is called an input credit.
You can only claim input credits for the amount of VAT shown on VAT invoices that you paid. Remember to file invoices to prove what you have spent money on. For example, you must keep salary slips, invoices from suppliers, slips to show how much petrol you have used if you use a car for business reasons, and so on.
Example
John is the only member of a CC called Better Copy. Better Copy is a printing and photocopy business. Better Copy is registered as a vendor. Better Copy must charge 14% VAT on all copying and printing that John and his employees do for customers. John must give a Better Copy VAT invoice to every customer.
Mary wants 20 copies made of a knitting pattern. Better Copy charges R5,00 to do this. John must add 14% VAT, which would be 70c. Mary must pay R5,70. John will send the 70c to the Receiver of Revenue, with all the other VAT paid by other customers over 2 months.
Better Copy bought a photocopy machine from IBM for R10 000. He paid R1 400 VAT on the machine. He therefore paid R11 400. IBM gave Better Copy an invoice with IBM's VAT registration number on it. Better Copy can claim the R1 400 from the Receiver because Better Copy is registered as a vendor. This R1 400 is called an input credit.
At the end of January, John adds up all the VAT which he has collected from his customers. The total is R5 000, which he owes to the Receiver. He has an input credit of R1 400, which is VAT he can claim back from the Receiver. John subtracts the R1 400 input credit from the R5 000 collected from customers. John must pay the Receiver R3 600.
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