A person is obliged to register as a value-added tax (VAT) vendor where such person makes taxable supplies (comprising standard and zero-rated supplies) in excess of R1 million in a consecutive period of 12 months.
A person may, however, voluntarily register for VAT where the person has already made taxable supplies exceeding R50,000 in a 12-month period, or where the person carries on an enterprise and has not yet exceeded the R50,000 threshold, but reasonably expects that the R50,000 threshold will be exceeded within 12 months from the date of registration.
Requirements
Small and start-up businesses are accordingly not required to register as vendors up until such time as such businesses' taxable income exceeds the R1 million threshold.
On registration as a vendor with SARS, a vendor is required to levy and account for VAT on goods or services supplied in the course of his/her enterprise, and may claim input tax deductions incurred in respect of goods or services acquired in the course of making taxable supplies.
A registered vendor is required to issue tax invoices in respect of supplies made and to retain certain documentary proof in accordance with the Value-Added Tax Act 89 of 1991. A vendor is also required to complete and submit VAT returns, and to make payment of any VAT amounts due to SARS in accordance with his/her allocated tax period (generally on a bimonthly basis). Failure to adhere to these obligations may result in the imposition of penalties and interest.
These compliance requirements placed on vendors may prove to be administratively burdensome, timeconsuming and costly for small or start-up businesses that do not have proper systems in place. Such businesses may incur costs of acquiring the services of an accountant, as well as costs of putting systems in place to ensure proper accounting and invoicing of clients.
Registration misconception
Despite the compliance burden associated with the registration as a vendor, as well as the obligations and liability flowing therefrom, many small and start-up businesses making standard-rated supplies often operate under the misconception that it is always beneficial to register as a vendor with SARS on commencement of their businesses, so that they may be able to claim input tax deductions on their expenses incurred. The question of whether it is beneficial to voluntarily register as a vendor depends, however, on a range of factors, in particular the nature of the business and the type of expenses incurred by such business.
Although it will be beneficial for a vendor making zero-rated supplies to register voluntarily, this is not the case for a vendor making standard-rated supplies. This is because it is often the case that the biggest expense incurred by small businesses comprising, in particular, service organisations or professional businesses, will be payroll costs - ie staff costs - in respect of which no input tax may be deducted. The bulk of expenses incurred by these businesses are accordingly non-deductible, leaving the vendor with a very small percentage of available input tax deductions.
If the cost and administrative burden associated with VAT registration is weighed up against the monetary benefit obtained from claiming input tax deductions on registration, a business may decide that it is more beneficial to remain unregistered, and to instead consider increasing its profit margin earned on the supply of goods or services by a percentage that is less than the standard VAT rate. These businesses may then compete as a preferred supplier to non-vendor recipients, or recipients who acquire the goods or services for a non-taxable purpose.
Registration with benefits
Notwithstanding the above, certain types of businesses, for example manufacturing concerns and certain retailers, may benefit from VAT registration, on the basis that such businesses incur higher levels of tax-deductible overhead expenses, such as the cost of plant and machinery, in proportion to their non-deductible expenses, such as payroll costs and entertainment. It should also be noted that, despite the option to register for VAT voluntarily, and although not required by law, many large businesses, and even government departments, require their suppliers of goods or services to be registered as VAT vendors.
A business should accordingly consider the nature of expenses it will incur, the nature of the supplies it will make and the nature of its client base, so as to determine the cost benefit of voluntarily registering for VAT.
Recent regulations issued by SARS
On 29 May 2015, the minister issued regulations prescribing the requirements that must be met by a person applying for voluntary registration in terms of section 23(3)(b)(ii) of the VAT Act. Section 23(3)(b)(ii) provides that a vendor may apply for voluntary registration where such person carries on an enterprise and can reasonably be expected to make taxable supplies in excess of R50,000 within 12 months from the date of registration.
In terms of the regulations, the commissioner will be satisfied that a person can reasonably be expected to make taxable supplies in excess of R50,000 in the 12 months following the date of registration where:
- In the case of a person who has made taxable supplies for more than two months, such person has proof that the average value of taxable supplies in the preceding two months prior to the date of application for registration exceeded R4,200 per month; or
- In the case of a person who has made taxable supplies for only one month preceding the date of application for registration, such person has proof that the value of the taxable supplies made for that month exceeded R4,200; or
- The person is, in terms of a contractual obligation in writing, required to make taxable supplies in excess of R50,000 in the 12 months following the date of registration; or
- The person has acquired finance from certain specified credit providers, wherein credit has been provided to fund the expenditure incurred or to be incurred in furtherance of the enterprise, and the total repayments in the 12 months following the date of registration will exceed R50,000; or
- The person has proof of expenditure incurred or to be incurred in connection with the furtherance of the enterprise, as set out in a written agreement, and proof of payment or a payment agreement evidencing payment in the furtherance of the enterprise which has exceeded R50 000 at the date of application for registration; that will in any consecutive period of 12 months, beginning before the date of application and ending after the date of application, exceed R50,000; or will in the 12 months following the date of application for registration exceed R50,000.
With effect from 1 April 2014, a further category of persons entitled to register for VAT on the voluntary basis are persons who carry on an enterprise of a nature as set out by the minister in any regulation (section 23(3)(d) of the VAT Act). The nature of the enterprise must be such that substantial costs are incurred which are likely to result in the making of taxable supplies only after a period of time. The minister published the relevant regulations only on 29 May 2015, specifying the types of enterprises that will qualify for registration under this category. The enterprise activities provided for in the regulations include broadly: agriculture, farming, forestry and fisheries; mining; ship and aircraftbuilding; manufacture or assembly; property development, infrastructure development and beneficiation.
Prior to these regulations having been issued, vendors seeking to register with SARS under this category have experienced practical difficulty in doing so, as the regulations setting out the types of permissible activities were not yet in force. It is expected that, provided vendors seeking to register under this category of registration comply with the regulations, they should now have no difficulty in doing so.
Source: The Times via I-Net Bridge
