Important things that every business owner should know about VAT.
From our experience, most business owners get upset or feel they are dealt a bad card when we as accountants tell them they have to pay VAT to SARS. For some reason, the concept of how VAT works is seldom understood by new business owners and they feel that they are parting with their hard-earned money when they have to pay VAT to SARS.
We thought to share some important aspects that every business owner should understand regarding VAT.
Business owners who are registered for VAT are required to charge VAT to their customers on the selling price of all goods and services. It’s important to note that not all businesses are required to charge VAT, it’s only if a business is a VAT vendor that the business must charge VAT on the purchase price of goods sold or on services rendered.
When a business is set up it is not automatically a VAT vendor; becoming a VAT vendor requires an application to SARS. In certain circumstances a business may voluntarily register as a VAT vendor, in other circumstances, it is required to (depending on the annual turnover)
A business can voluntarily register for VAT when they have more than R50 000 turnover for a 12 month period. When a company’s turnover hits the R1 million mark it is compulsory to register for VAT. It is important to note that a company should not trade with a turnover of more than a million without being VAT registered. SARS will backdate your VAT registration and require you to give them 15% VAT even though you did not charge your clients VAT. When your monthly turnover reaches R83 333 or more on a regular basis you need to register for VAT before it will hit the R1 million mark.
The effects of being a VAT vendor
When you’re a VAT registered business you are obligated to charge VAT at 15% on all goods sold and services rendered to your customers/clients (unless the goods are zero-rated or exempt). It is important to note that your pricing is crucial here, you must first determine what you need to sell a product for or charge for services rendered to make a profit. Once you have this price you add the 15% to your selling price.
Business owners are basically levying or collecting VAT on behalf of SARS. If your pricing is not right and you sell a product without adding the 15% after you calculated what your business needs to make a profit it will end up in massive cash flow issues since you will need to pay 15% to SARS.
We do understand that your product and services will become more expensive when dealing with non-VAT entities/individuals or businesses. This sometimes results in a company losing its competitive pricing advantage. But if your clients are also VAT vendors and you increase your pricing with 15% it will not affect them since they can claim the VAT they pay to you back from SARS.
The VAT that you collect on behalf of SARS needs to be paid over when you file your VAT returns (normally every second month). What companies tend to forget is that as a VAT registered company your business is entitled to claim input tax ( it’s the 15% VAT that you pay when purchasing goods and or services). This means that your business can reduce the cost of goods purchased or services rendered by claiming the input tax back from SARS.
If you purchase raw materials or other products that you use in the production of your products or services from a VAT vendor you can now claim back the VAT resulting in you reducing your costs. When you were a non-VAT vendor it’s very important for you to know your numbers and your break-even point.
When your business is VAT registered, your cash flow position can increase, since you can claim back the VAT paid as part of your expenses to produce your product or deliver your service.
Non Vendor VAT vendor VAT vendor
Price incl VAT Price Excl VAT
Selling price R100 R115 R100
Cost of sales R75 R75 R65.22
Profit R25 R34.78
VAT due to SARS R0 R5.20
It is thus crucial and important to ensure your pricing is right when you’re a VAT registered business to prevent it from eating into your cashflow position.
Apart from pricing another major factor to consider when registering for VAT is that SARS expects you to pay VAT on accrual. This means that when you raise a VAT invoice you are expected to pay the VAT to SARS. If you run debtors and you have 30-day accounts or longer this will result in you having to pay VAT to SARS in monies that you have not received yet, this will have a big impact on the cash flow position of your company.
It is recommended that instead of sending tax invoices you send proforma invoices and convert them to tax invoices once you receive the money, thus not paying VAT to SARS before receiving the money.
VAT also brings with it some compliance cost since most owners make use of accountants to calculate their VAT. We recommend that you partner with a company who assist you with cloud accounting and who is willing to work with you and teach you how VAT works and how to file the return on e-filing and make payments to SARS.
I hope we were able to shed some light on VAT and best practises. Remember VAT is a statutory cost that you have to pay. We’ve seen many people lose their businesses because of tax audits. It’s just not worth it. Remember: what goes around comes around. The truth always comes out, and you will be left with the consequences. Rather partner with accountants that act as business advisors to your business that spends time on a monthly basis with you to ensure that your financial matters and cash flow position is understood and looked after.