Forms, filing, queues, spreadsheets and legislative regulations – the South African small to medium business (SME) has a number of administrative hoops to jump through when it comes to the tricky topic of VAT. If the small business isn’t completely au fait with how VAT is structured and their obligatory level of compliance, then the implications can be very expensive indeed.
“VAT is classified as an indirect tax and is essentially a tax that is levied along a supply chain based on the value added to the product with the end user paying the final tax amount,” says Greig Sinclair, partner at Hobbs Sinclair. “Output VAT is the tax levied on a vendor’s turnover where the vendor collects the tax on behalf of SARS. Input tax is the VAT the vendor paid across to another for purchases made. When submitting a VAT return, the vendor takes the output VAT total for the period, less the input VAT total and the resultant amount is either paid to, or refunded from, Sars.”
VAT comes with a plethora of restrictions, qualifications and requirements and each of these affects the business differently. The various thresholds applied to VAT compliance also play a role in how regularly the business has to file their VAT forms, which can be as often every two months. The SME can also choose to voluntarily register, they can receive a concession if they are a natural person, or they are forced to register based on their annual turnover.
“The threshold is a compulsory R1-million over a 12-month period for registration, voluntary registration is possible subject to certain conditions and it is possible for natural persons with a turnover below a certain threshold to register on the cash payments basis for VAT,” explains Lucia Hlongwane, head of tax at Barclays Africa. “If you are registered on the accrual basis you need to account for VAT based on invoices received or raised, irrespective of whether these invoices were paid or not. If you are registered for VAT, whether compulsory or voluntary, you need to submit VAT returns for the registration periods which are mostly every two months if turnover is less than R30-million per year.”
The VAT system is not simple. It is not something that the SME can necessarily pick up and run with, certainly not without assistance from a professional. According to the Small Business Project’s SME Growth Index for 2014, the average amount of time spent by the SME on red tape is eight working days (75 hours) in a month.
The survey found that while SARS is efficient at collecting revenue, it is less efficient at refunds or problem solving. This is an issue raised in the Davis Tax Committee interim SMME report that recommended the introduction of possible time limits for Sars to process refunds. However, this will require additional investigation to assess the implications of placing time limits on Sars.
“Often businesses will issue a tax invoice but only receive payment in a later period,” says Dr Anne Bardopoulos, Senior Manager and VAT specialist at Deloitte. “As such, the business may have to carry the ‘cost’ of the VAT – which must be declared to SARS – until the business receives payment from the customer. There could be more done by Sars to ensure that SMMEs are assisted with receiving VAT refunds and resolving queries timeously.”
The issues around these delays and the impact on the SMME saw the Davis Tax Committee recommend the introduction of a dedicated SMME desk. In his 2015 budget speech, Finance Minister Nhlanhla Nene showed that the government had paid attention.
“In line with the recent Davis Committee’s recommendation, the Minister noted that Sars is establishing small business desks in its revenue offices to assist in complying with tax requirements,” says Louwrens van der Vyver, Sanlam Group Tax Advisor. “These are positive developments which, if implemented effectively, will make a real difference to the growth and efficiency of small and medium sized businesses.”
However, this does not lessen the administrative burden felt by SMMEs and their lack of knowledge and time to ensure proper compliance has significant cost implications. Not only does non-compliance come with its own set of financial risks, but SMME’s often don’t have the financial means to employ professional services to assist with resolving issues or queries with Sars or following up on their behalf to speed up a VAT refund process. It seems that if the SME is liable for VAT, then they will need to fork out for an expert.
“Once you are VAT registered you must either get an accounting firm involved to make sure you keep your accounts and admin in order, or have an in-house accountant who will help you to implement these changes and keep track of accounting to do proper VAT reporting back to Sars,” says Chantal Jones, financial manager at Realmdigital, itself a small business that develops online platforms for other companies.
Guillaume Jordan, Director at Chess Accounting Consultants, adds: “People start a small business because they have a certain skill, service or product. They are not usually chartered accountants nor do they have any financial training. There are rarely any surplus funds to pay for bookkeepers or accountants so business owners spend far too much time on admin – salaries, wages, PAYE, SDL and UIF and bi-annual IRP5. Becoming a VAT vendor is another onerous task that falls on the shoulders of the business owner as they basically become a tax collecting agent for SARS without any remuneration.”
This is then added to the financial burden of VAT registration costs, record keeping, filing VAT returns and ensuring compliance. Jordan does not see much of a benefit in VAT for SMMEs that sell a service as they are not buying a product that can be offset against a sale and Dr Bardopolous agrees: “When dealing with the final consumer who is not VAT registered, the product supplied, especially services, will be more expensive (up to 14%) when compared to a person who provides the same product but who is not VAT registered.”
The experts almost all point out that the cash flow of SMMEs generally does not accommodate the money needed to pay VAT when it is due.
“Sars tried to address this issue with turnover tax, but the qualifying criteria exclude a lot of small businesses,” says Jordan. “The government needs to re-examine the statutory requirements for SMMEs and turnover tax and make it possible for them to submit fewer documents so more time can be spent on developing and growing their businesses, rather than on admin.”
For small businesses that have slowly grown from the garage to the boardroom, the learning curve is very steep and, if they get it wrong, very expensive. However, it is not all paperwork and queues, as there are some advantages for SMMEs.
“The compulsory VAT registration threshold is set relatively high and, coupled with the two different types of allowable VAT reporting of accrual or cash, the system is flexible to a large extent,” says Hlongwane. “It excludes a lot of SMMEs for which there is no benefit for registration for VAT and yet allows for voluntary registration if there is a benefit.”
Ettiene Retief, chairperson of national tax (policy) and Sars/national treasury stakeholders committees of the South African Institute of Professional Accountants says: “Dependent on the type of business, the claiming of input tax deductions could be regarded as a benefit, as the VAT you pay for goods or services used, consumed, or on-supplied in making taxable supplies is claimed back and this then reduces your cost by the VAT amount. If your customers are corporates that can claim the VAT you charge back, then being registered does have its benefits.”
There is also another side benefit to all the admin, says Bardopolous: “The requirement to file returns on a bi-monthly basis does force compliance and proper accounting records so the business to keeps its records in order, which can only benefit them in the long run.”