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Chapter 13 - Small Business Law

Value-added tax (VAT)

VAT is paid by each producer or distributor who handles the goods before they reach the final consumer, who is usually a member of the public. It is called value-added tax, because tax is paid at every stage where value is added to the product.

VAT vendors

When a business is registered as a vendor, it means two things:

• The vendor must collect VAT from customers and pay this VAT to the Receiver.
• The vendor can claim back any VAT that is paid on anything bought for the business.

Who should register as a vendor?

If the valuable turnover (the total of all the sales, without subtracting the costs) of a business is more than R1 000 000 (R1 million) per year, then the business must be registered as a vendor by completing VAT 101 and VAT127. When you start a business, if you think the turnover will be more than R1000 000, then you have to register as a vendor.
If the turnover of the business is less than R1000 000 per year, the owner can choose to register or not. If you register, this is called voluntary registration. If the turnover is less than R50 000 per year then the business is not allowed to register. It takes a lot of effort and work to pay VAT to the Receiver regularly and to keep all the records the Receiver wants a vendor to have. If you don’t have to register, it is only a good idea to register if the business buys lots of things from suppliers and can claim back VAT to reduce the amount of VAT you owe SARS.
If the business is a sole trader or a partnership, the owners must register in their own names. If the business is a CC or a company, the owners must register in the name of the business.

See Problem 3: Is being a VAT vendor worth it?

The Small Retailers VAT package

The Small Retailers VAT Package is a simpler VAT option for small retailers and has been created by SARS to assist small businesses. If you qualify for the Package it means that you can satisfy the VAT Act without keeping detailed records or having to buy expensive cash registers to keep track of sales on the various types of products you sell.

The Package also includes a free set of pre-printed books in which you keep track of the stock you buy and your daily sales.

Why was the Small Retailers Package introduced?

1. To make it simpler for small retailers who are registered for VAT.

Many small retailers find it difficult and time consuming to keep the detailed sales records required by the VAT Act. The Small Retailers VAT Package will make accounting for VAT much simpler for small retailers.

2. To make it simpler for small retailers who are not registered for VAT to satisfy the law.

All retailers who have a turnover of R1000 000 or more per year must register for VAT. There are many small retailers who should register for VAT but do not because small retailers feel the process is too complicated and takes too much time. The Small Retailers VAT Package aims to encourage unregistered retailers to register for VAT. 

3. To reduce VAT fraud.

Who qualifies for the Small Retailers VAT Package?

If you are not registered for VAT - You will first have to register for VAT before you can apply for the Small Retailers VAT Package.

If you are already registered for VAT - You qualify for the Small Retailers VAT Package only if you satisfy the requirements to become an approved vendor.

How do you register for VAT?

You can register for VAT by visiting a SARS branch or by calling the SARS Call Centre on 0860 121218 or visit the website at www.sars.gov.za (click on Value-added tax) for more details.

You must get the form VAT101 from SARS and complete it. You can download this from the SARS website. After you have completed it, deliver it to SARS. SARS will issue you a registration number. It is advisable to get professional help to register for VAT.

How does VAT work?

SARS will issue the business with a registration number, which is called a VAT invoice number. This number requires the person or business to charge 14% VAT on goods or services the business sells.

Example: Nomawethu types letters for other people. She is registered as a vendor. She charges R50 to type one page. She must charge 14% VAT on top of that. In other words, 14% of R50 is R7. So she charges R50 + R7 = R57 altogether.

VAT invoices

Vendors must give their customers a VAT invoice, to charge them for the goods or services. The invoice must have the following written on it:

• the words "Tax Invoice"
• the VAT registration number of the business
• the amount of VAT paid by the customer separately from the price of the goods or services.
• if over R5000 the VAT number of the buyer.

Remember to check that the VAT invoices you receive from other businesses have all these details on them if you are going to claim the VAT back from SARS. If an invoice does not have all these things on it, you cannot claim the VAT back.

What records must be kept for VAT purposes?

Businesses registered for VAT must keep records, which show how much VAT they have collected. Even after the business has closed, the business must keep the records for 5 years.  These are examples of records that must be kept:

• invoices from your business to customers
• invoices from your suppliers to you
• a list of debtors (that owe the business money) and creditors (that the business owes money to)
• bank statements, deposit slips, copies of cheques (the owner of the business must have a bank account)
• books of account, where the owner of the business writes down how much money has come into the business every month, and how much money has been spent and on what

Paying VAT to the SARS

If you are registered as a VAT vendor you will have to submit a return and pay the VAT over to the SARS every few months depending on the category that the business falls into..

The owner of the business must calculate how much VAT is owed to the Receiver. A standard VAT return must be submitted on e-Filing by the end of the month following the VAT period. The return form is VAT 201.  SARS will impose penalties and interest for people who submit their returns late.  Penalties are 10% of the amount that is owing and interest is charged at the standard interest rates.

Businesses have to pay VAT on goods or services if they have invoiced customers. This is called paying VAT on an invoice basis. It means that if the owner of the business invoices customers, the owner has to pay over the VAT to the Receiver even if the customer has not yet paid. This could cause cash flow problems for the business.

The owner of the business can do three things:

• Apply to the Receiver in writing to pay VAT on a payments basis. This means that you only pay VAT to the Receiver when your customers have paid.
• Ask customers to pay their account immediately when they buy the goods or when they receive the service.

Charge customers interest if they do not pay your invoices within 30 days.

Claiming input credits

The vendor can claim back any VAT that is paid on anything bought for the business which relates to providing a valuable service or supply. The VAT which the vendor can claim back is called an input credit.

You can only claim input credits for the amount of VAT shown on VAT invoices that you paid. Remember to file invoices to prove what you have spent money on. For example, you must keep salary slips, invoices from suppliers, slips to show how much petrol you have used if you use a car for business reasons, and so on.