Should my small business be registered for VAT?

Value Added Tax (VAT) is a valuable source of government revenue, and as a business owner, you must be aware that when your business grows larger you may be required to register as a VAT vendor, to charge your customers or clients VAT and pay it over to the South African Revenue Service (SARS). If you do not comply, you are breaking the law.

Who must register for VAT?

If the taxable value of your business’s goods or services (turnover) exceeds R1 million at the end of any 12-month period, you must register for VAT.

If, at the commencement of any month, you have written contractual commitments that will exceed R1 million within the next 12 months, you must also register for VAT. You have 21 business days in which to register for VAT.

You can register voluntarily

If your business’s turnover exceeded R50 000 in the previous 12 months, you can voluntarily register for VAT. If you expect your turnover to exceed R50 000 within 12 months from the date of VAT registration you can also register for VAT voluntarily. This applies to companies as well as self-employed individuals, such as freelancers.

Can SARS automatically register my business for VAT?

If the South African Revenue Service (SARS) discovers that your business has exceeded the R1 million annual turnover threshold, they can register you automatically. SARS can backdate the registration to when the business first crossed the threshold, leading to unexpected penalties and interest, even if you never charged your customers VAT. This can lead to serious cashflow issues in your business.

You will need to file VAT returns.

How does VAT work?

If you are registered for VAT, you must add 15 percent on to the price of your goods or services, which is the final price the customer pays. When a customer pays you the additional 15 percent, remember that this is not your cash, and needs to be paid to SARS when you complete your VAT return.

You then claim back the VAT that you paid when purchasing goods or services from your suppliers that are VAT registered. If you collect more VAT on your sales than you paid to your suppliers, you must pay the excess over to SARS. If you paid more VAT to your suppliers than what you collected from your sales, then SARS will refund you the excess.

What is VAT zero-rated and what does it mean?

Some goods are zero-rated for VAT, meaning that they are sold including VAT, but the rate is zero and not 15 percent. Examples of these include, amongst others:

• Export of goods
• Services supplied to non-residents
• Basic food items such as rice, milk, eggs, brown bread, and maize meal
• Farming inputs
• Goods where there is a fuel levy, such as petrol and diesel
• Illuminating paraffin
• The sale of an enterprise as a going concern

Businesses selling these goods can claim all input taxes they paid to suppliers to produce these goods.

What businesses are exempt from VAT?

If a business is exempt from VAT, no VAT is included in the selling price, and no VAT can be claimed back from production costs. VAT-exempt businesses include:

• Non-fee related financial services
• Education services provided by an educational institution
• Residential rental accommodation
• Charities
• Organisations classified as exempt by SARS
• Businesses selling VAT-exempt products
• Public road and rail transport
• Child care services

If you produce VAT-exempt goods or services, you can’t claim VAT and are not required to register for VAT.

The plus side of being VAT registered

You can claim VAT back on the materials and services purchased, which could be a substantial cost saving if you are purchasing from VAT vendors.

Other VAT-registered businesses may prefer to do business with you. This provides you with a competitive advantage.

You will have to keep comprehensive records which will benefit your business.

Drawbacks to being VAT registered

Your prices will increase if you charge VAT on all your products or services. This could be a competitive disadvantage, particularly if your customers are not registered for VAT.

Submitting VAT returns increases your administrative load, and you might need the services of an accountant.

Paying VAT may cause cash flow issues if you need to pay VAT over to SARS on the invoice basis before you receive payment from the customer.

You need to adhere to strict VAT regulations and could face penalties and interest if you do not comply.

Can I cancel my VAT registration?

If the value of your turnover falls below the R1 million threshold, or your business closes, you can apply to cancel your VAT registration. The cancellation is not automatic; you need to apply to SARS, and they will cancel the registration only if they are satisfied you no longer need to be registered.

You must notify SARS as soon as possible, and the business will remain liable for any outstanding VAT debts while it was registered.