What is VAT

VAT is an acronym for Value Added Tax. In South Africa, VAT is currently 14% of the value of goods and services. VAT is an indirect tax; this means that the government gets money from the manufacture or sale of goods and services, rather from direct payments from the tax payer to the government. Consumers of these goods and services pay an additional amount on top of the final sale price in order to be compliant with the tax laws of the country in which they live.

In South Africa, most goods and services are levied with a flat 14% VAT rate; there are, however, a select range of goods and services that have exemption from VAT (see this article for more). VAT is an incredibly important mechanism for creating government revenue. VAT is a relatively recent addition to South Africa’s tax system, introduced in 1991 at a rate of 10%.

In 2014, VAT accounted for 30.5% of all government tax revenue, on average, in the Organisation for Economic Co-operation and Development (OECD) countries (a group of the most developed nations). In the same group of countries, the share of VAT in gross domestic product increased from 3.2% in 1965 to its present share of 7%.

In South Africa, VAT was the second largest contributor to total tax revenue, after personal income tax. R281.1 billion was collected in 2015/2016, which was a 7.6% increase from the previous year, and amounted to 26.3% of total tax revenues.

VAT is applied at each stage of production and distribution. So, the miner supplying metal to a nail manufacturer at R1 per 10g of steel, say, must charge an additional R0.14 for each R1. The nail manufacturer, selling the nails to a distributor at R10 per package must add R1.40 per package. The distributor, selling the nails to consumers at R20 per pack must add R2.80 to the final sale price. Each company at each stage of the process will be a VAT vendor, and able to reclaim their VAT expenditure – the consumer absorbs the VAT burden.

In South Africa VAT must be included in the final sales price of the good or service, as advertised to the consumer. This is unlike the United States of America for instance, where taxes on final goods and services are not included in the price of these items as advertised to the consumer.

Those who supply goods and services to consumers have to register with the taxman in order to be compliant with VAT legislation. Currently, any South African supplier that makes or sells goods or services with a value of R1 million or more, in a 12 month period, is obligated to register as a vat vendor (see the next article in the series for more on VAT vendors, and how to register[link]). There are currently 425,225 active VAT vendors in South Africa.

What is a VAT vendor, and which items are exempt from VAT

In part one of this VAT series, we looked at what VAT is. In this article, we’ll be examining what a VAT vendor is, and which items are excluded from VAT.

A VAT vendor is a person, business, trust, or other entity that is registered with the government’s revenue service, and is obligated to pay VAT on purchases, and levy VAT on sales of goods or services.

You are obliged to become a VAT vendor in South Africa if total sales in a calendar year exceed R1 million. Similarly, if your turnover exceeds R50,000, then you can voluntarily apply for VAT vendor status.

In order to become a VAT vendor in South Africa, you must complete the registration process using a VAT101 form (we cover the registration procedure here), or, if you’re registered with SARS e-filing

When importing goods, VAT is also levied, except in certain situations. VAT is calculated separately from tariffs and import levies – remember that VAT is ultimately a tax that is taken on by the final consumer of the good or service, and that VAT vendors can claim back their VAT expenses from the revenue service.

There are, however, goods and services that are designated by the government as exempt from VAT. These will now be discussed.

Which items are excluded from VAT?

VAT is an indirect tax levied against the sale of good and services. This tax covers most items on the market. There are, however, a select group of goods and services that are exempt from VAT.

Exported goods are exempt from VAT. This is because these goods will be subject to VAT or sales tax in the country of destination since the final consumers of the exports will not be in South Africa, and will face tariffs and import duties in those countries too.

There are 19 basic food items that are exempt – this is to ease the financial burdens of the poorest consumers, and ensure that there is little chance of people going hungry due to limited budgets. These goods are: brown bread, maize meal, samp, mielie rice, dried mielies, dried beans, lentils, tinned pilchards and sardines, milk powder, dairy powder blend, rice, vegetables, fruit, vegetable oil, milk, cultured milk, brown wheaten meal, eggs, and edible legumes and pulses of leguminous plants.

Farming inputs are also zero-rated for VAT, as is paraffin for lighting, goods subject to the fuel levy, international transport services, and the sale of going concerns. VAT exemption is also granted to educational services, residential rental accommodation, public transport, and non-fee related financial services.

Further, if your business is located in an industrial development zone, you can get VAT exemption on a number of imported goods and services.

How Sage can make your VAT returns easy

Sage’s integrated cloud-based accounting software is the ideal platform from which you can arrange your financial affairs, and its capabilities in aiding your tax are exceptional. Sage’s benefits for filing VAT returns are multi-faceted.

Sage’s invoicing capabilities provide the essential foundation for a hassle-free tax season. With Sage, you can move to a paperless invoicing system. The benefits of such a system extend beyond environmental awareness – with electronic invoicing, your receipts are automatically organised, and the information from your invoices is fed into your broader financial profile automatically.

VAT invoices

Remember, that for any sale over R50, a tax invoice must be issued. These invoices are crucial. They are the evidence that establishes, for a VAT vendor, how much in VAT payments they are eligible to claim back from the tax authorities.

Sage for mobile allows you to issue and service invoices from your smart phone, with the information feeding back into your main Sage account. This means that you can secure business immediately, with no hesitation.

So, Sage’s services provide the foundation of a tax season that involves minimised effort, and one that puts your business in accord with financial best practices. A well-structured financial profile has benefits beyond saving time on tax – you’re far more likely to receive rebates from the revenue service if your books are in impeccable order than if they are in a state of chaos, and application for business support (subsidies or credit applications) are more likely to be approved when the vendor of the support is assured by the quality of your financial records.

Get the right information

With the foundation in place, you can use Sage to go about the business of doing your tax. Sage allows for easy transfer of information between your Sage for small business software, and your accountant’s edition of Sage. Not only will your accountant appreciate that they will need to spend less time and effort having to reconcile your books, but you’ll also pay less, as the hours they’ll need to spend working on your books will be significantly reduced, if you’ve been following best practice.

Sage’s tax functionality allows you to process and pay your tax from within the software. Using the Reports function, select the VAT option. This will take you to the VAT return and reports option. From here you can select the VAT 201 calculation report. All you need to do is ensure that the time period for the VAT report is correct, that all the relevant transactions for the VAT period have been processed, and that all the transactions are assigned to the correct VAT type. While this report cannot directly be submitted to SARS, it will consist of the most important data, and can be the foundation of your VAT report.The amount of VAT charged, or a statement to the effect that VAT at the rate of 14% is included in the total cost of the goods.

Am I eligible for a VAT rebate?

VAT stands for value added tax, and is a tax levied on most goods and services traded within the South African economy at a fixed rate of 14%, added to the final sale price of the good or service.

There are two main ways in which someone can receive money back from VAT expenses. If you’re a VAT vendor, and there is difference between the VAT you have collected and the VAT you have paid that means that you’ve paid more than you have collected, then you are entitled to receive the difference back from the revenue service.

The VAT vendor’s deal

If the income that your business has earned exceeds R1 million in a 12 month period, then you are obligated to register for VAT with the South African Revenue Service. When your business buys goods and services from a supplier, the final sale amount will contain VAT. When your business sells goods or services on to a consumer or another business, your final sale price will include VAT. The revenue service is interested in the difference that your business generates between VAT paid and VAT collected. If you pay more than you collect, you are owed by the revenue service; if you collect more than you pay, then you woe the revenue service.

With Sage One Accounting you can have you VAT obligations and calculations made simple. As long as you collect and register every purchase and sale over R50 in the Sage system (thanks to Sage’s digital invoicing capabilities, this can be a painless task), you will have an up-to-date record of your VAT obligations.

When it comes time to attend to you VAT (do this at least 21 days before the 12 month cycle is completed), you can generate a VAT201 report using Sage’s reporting functionality that will calculate for you your VAT position.

The tourist’s treat

Alternatively, if you are a foreign tourist, and have paid VAT on the purchase of a good or service that has cost more than R250, the n you are able to claim back the VAT on these purchases at a VAT Refund Administrator’s Office. These are usually located at major international gateways, such as Cape Town International Airport, Johannesburg’s OR Tambo International Airport, major land border crossings, and some commercial harbours.

Claiming VAT back on purchases made in South Africa is reserved exclusively for foreign nationals. In order that your VAT rebate claim is accepted by the revenue service, you need to make sure that you have an acceptable invoice.
When you are purchasing goods, make sure to identify yourself as a foreign tourist to the shop attendant, and request a tax invoice. Your tax invoice has to contain all the following information:

  • The amount of VAT charged, or a statement that VAT is included in the total cost of the goods
  • The quantity and full description of the goods purchased
  • A unique serialised tax invoice number
  • The buyer’s name and address
  • The amount of VAT charged, or a statement to the effect that VAT at the rate of 14% is included in the total cost of the goods.

A guide to VAT registration

Registering for VAT in South Africa has become a lot easier in recent years, thanks to the introduction of electronic filing. Before this became possible, you’d need to go to the revenue service’s offices, trusting that you had brought along with you all the information and documentation needed to complete the process. Even if you’d managed to collect everything you could possibly need, you’d still have to negotiate the crowds of people doing the same, and the sparsely distributed disinterested bureaucrats manning the desks.

While internet registration and filing has significantly improved this once arduous process, there are still some things that you ought to keep in mind in order to avoid frustration.

To begin with: know whether or not you are legally obliged to register to be a VAT vendor. The current South African legislation requires any entity with a turnover of more than R1 million over the course of 12 months to register as a VAT vendor. If turnover exceeds R50,000, then you may voluntarily register for VAT vendor status – this is a useful thing to do, even if your business is in its infancy, as you can claim back VAT, and, other businesses see VAT vendor status as a signal of professionalism.

If you’re about to reach 21 days of exceeding the R1 million limit on your year’s turnover, you have to get the VAT vendor application for completed and returned to SARS for processing.

VAT101

If you’re not registered for e-filing, then you’ll need to download, print out and fill out the VAT101 form. On this for you need to list:

  • Nature of entity – is it a company, individual or trust applying?
  • Your personal and company details
  • Trading name of the applicant
  • Company/Closed Corporation/Trust registration number
  • Financial year details
  • Industry classification
  • The details of your representative taxpayer
  • The details of your entity’s members/trustees/beneficiaries/partners or directors
  • Banking details

Once you’ve completed the VAT101 form, you have to take this in to your nearest SARS branch, along with the required supporting documentation. This will include copies of identity documents for all relevant parties, proof of company registration, proofs of address, financial statements, and banking details.

VAT201

If you have already registered your business with SARS’ e-filing system, you can omit the second part of the process, and send through your documentation from your laptop. If this is the case, then you need to complete the VAT e-filing form, VAT201. Sage’s cloud-based accounting software can make this process easier.

Here are the steps that you need to go through:

  1. Login to SARS e-filing
  2. On the left-hand side bar, select “Organisations”, and select the “Organisation Tax Types” option. Once the screen is loaded, choose the VAT201 option.
  3. Fill in your VAT reference number, and choose the relevant local tax office. Click to continue – your application will take some time to be verified.
  4. Once your account has been validated and activated, you can proceed to complete the VAT201 online form, in accordance with the VAT101 form. Since you’re already registered for e-filing, much of the information will be pre-populated.
  5. Complete financial information regarding your VAT liability to the revenue service. The system does auto-calculate, but make sure that you have distinguished any items that are zero-rated for VAT. If you have registered for a diesel allowance, make certain to log the relevant figures here too.
  6. Once you’ve inputted all the relevant considerations, complete the payment details section, and, if applicable, request a VAT refund.
  7. Submit the form, and once complete, you’ll be given the option of completing a VAT payment. If you choose to do this, you can pay your VAT obligations, and receive a confirmation page that you can save and print out.

For more detailed instructions on the VAT process, you can turn to SARS’ official guide.

A regulatory checklist for SMEs

If you’re running a small business, you might feel overwhelmed by the many regulatory bodies and requirements in South Africa. From labour laws and tax regulations to municipal bylaws, health and safety regulations and consumer protection laws, you’ll be spending a great deal of your time simply trying to comply with a range of legislative and regulatory demands.

If you’re running a small business, you might feel overwhelmed by the many regulatory bodies and requirements in South Africa. From labour laws and tax regulations to municipal bylaws, health and safety regulations and consumer protection laws, you’ll be spending a great deal of your time simply trying to comply with a range of legislative and regulatory demands.

But rather than seeing legal and regulatory compliance as a burden, you’d be wise to embrace it as an opportunity to run more efficiently says Ivan Epstein, co-founder of Softline and CEO of Sage AAMEA (Australia, Asia, Middle East and Africa). “Compliance is hard work, but it will keep you out of trouble with authorities such as the taxman and the Department of Labour,” he says. “Plus, putting the processes and systems in place you need to satisfy various laws and regulations will give you visibility into, and control over, your business. What’s more, it’s also good for your relationship with customers and your reputation in the market.”

The demands you face will vary according to the size and the structure of your business. But here are a few points to keep in mind as the owner of a small business.

1. The taxman’s due

The South African Revenue Service (SARS) is one of the country’s most tenacious and professional government departments, so it’s wise to maintain a professional and transparent relationship. If you’re a sole proprietor or in a partnership, register with SARS as a provisional taxpayer.

If you have registered a company, be sure to register it with SARS, in addition to registering yourself as a taxpayer. If you have employees, you must remember to deduct tax from them and pay it to SARS each month. Also, you must collect and pay VAT if your business has an annual turnover in excess of R1 million.

2. Labour law

As an employer, familiarise yourself with the Basic Conditions of Employment Act. This law governs relationships between companies and employees, setting out rules around working hours, overtime, leave, and the processes that need to be followed should you need to dismiss an employee. You’ll also need to register with the Department of Labour and contribute to the Unemployment Insurance Fund (UIF).

3. Health and safety regulations

The Occupational Health and Safety Act give workers a range of rights in terms of health and safety in the workplace. Regulations in the Act provide guidelines around aspects of workplace safety such as first aid, protective clothing, machinery, ladders, firefighting equipment, ventilation, lighting, temperature, noise and asbestos.

4. Municipal bylaws

Municipal bylaws, governing zoning, noise levels, hygiene, and so forth will also have impact on your business. For example, you will probably need permissions to run a noisy manufacturing operation or a night club in a quiet suburban street, and should you wish to renovate your office building you may also need permission for that

5. Consumer protection

With laws such as the Consumer Protection Act, government and regulators are becoming more stringent about consumer rights in South Africa. You should investigate what these laws have to say about how you should advertise your goods, structure your contracts with consumers, handle customer data, deal with merchandise returns under warranty, and so on.

Epstein says that many of these laws and regulations can seem intimidating to an entrepreneur just striking out on his or her own. “It’s not a bad idea to consult an expert for help when you’re not sure about how the law might affect your business,” says Epstein. “Rather seek professional tax, accounting or legal help than risking non-compliance—it will be well worth the investment.