Voluntary VAT registration: when to raise your hand & recent regulations

vat 1Author: Varusha Moodaley – Tax Associate at ENSafrica

A person is obliged to register as a value-added tax (“VAT”) vendor where such person makes taxable supplies (comprising of standard and zero-rated supplies) in excess of R1 million in a consecutive period of 12 months.

A person may however, voluntarily register for VAT where the person has already made taxable supplies exceeding R50 000 in a 12 month period, or where the person carries on an enterprise and has not yet exceeded the R50 000 threshold, but reasonably expects that the R50 000 threshold will be exceeded within 12 months from the date of registration.

Small and start-up businesses are accordingly not required to register as vendors up until such time that such businesses’ taxable income exceeds the R1 million threshold.

Upon registration as a vendor with SARS, a vendor is required to levy and account for VAT on goods or services supplied in the course of his enterprise, and may claim input tax deductions incurred in respect of goods or services acquired in the course of making taxable supplies.

A registered vendor is required to issue tax invoices in respect of supplies made and to retain certain documentary proof in accordance the Value-Added Tax Act 89 of 1991 (the “VAT Act”). A vendor is also required to complete and submit VAT returns, and to make payment of any VAT amounts due to the SARS in accordance with his / her allocated tax period (generally on a bi-monthly basis). Failure to adhere to these obligations may result in the imposition of penalties and interest. These compliance requirements placed upon vendors may prove to be administratively burdensome, time consuming and costly for small or start-up businesses that do not have proper systems in place. Such businesses may incur costs of acquiring the services of an accountant, as well as costs of putting systems in place to ensure proper accounting and invoicing of clients.

Despite the compliance burden associated with the registration as a vendor as well as the obligations and liability flowing therefrom; many small and start-up businesses making standard-rated supplies often operate under the misconception that it is always beneficial to register as a vendor with SARS upon the commencement of their businesses so that they may be able to claim input tax deductions on their expenses incurred. The question of whether it is beneficial to voluntarily register as a vendor depends however, on a range of factors, in particular, the nature of the business and the type of expenses incurred by such business.

Although it will be beneficial for a vendor making zero-rated supplies to register voluntarily, this is however not the case for a vendor making standard rated supplies. This is because it is often the case that the biggest expense incurred by small businesses, comprising in particular of service organisations or professional businesses, will be payroll costs, i.e. staff costs in respect of which no input tax may be deducted. The bulk of expenses incurred by these businesses are accordingly non-deductible, leaving the vendor with a very small percentage of available input tax deductions. If the cost and administrative burden associated with VAT registration is weighed up against the monetary benefit obtained from claiming input tax deductions upon registration, a business may decide that it is more beneficial to remain unregistered, and to instead consider increasing its profit margin earned on the supply of goods or services by a percentage that is less than the standard VAT rate. These businesses may then compete as a preferable supplier of non-vendor recipients, or recipients who acquire the goods or services for a non-taxable purpose. Furthermore, a supplier who makes supplies of the nature which typically do not entitle the acquiring vendor to input tax deductions in respect thereof, e.g. motor dealers or entertainment enterprises, could, instead of registering for VAT, raise their profit margin by a percentage below the standard rate of VAT and still remain quite competitive whilst earning more profits. This is on the basis that vendors acquiring such goods or utilising such services will in any event, subject to certain exceptions, not be entitled to claim an input tax deduction in respect of such expenses incurred.

Notwithstanding the above, certain types of businesses, for example, manufacturing concerns and certain retailers may benefit from VAT registration on the basis that such businesses incur higher levels of tax deductible overhead expenses, such as the cost of plant and machinery, in proportion to their non-deductible expenses, such as payroll costs and entertainment. It should also be noted that despite the option to register for VAT voluntarily, and although not required by law, many large businesses and even government departments require their suppliers of goods or services to be registered as VAT vendors.

A business should accordingly consider the nature of expenses which it will incur, the nature of the supplies that it will make and the nature of its client base, so as to determine the cost benefit of voluntarily registering for VAT.

Recent regulations issued by SARS in respect of voluntary registration

The Minister has recently, on 29 May 2015, issued regulations prescribing the requirements that must be met by a person applying for voluntary registration in terms of section 23(3)(b)(ii) of the VAT Act. Section 23(3)(b)(ii) provides that a vendor may apply for voluntary registration where such person carries on an enterprise and can reasonably be expected to make taxable supplies in excess of R50 000 within 12 months from the date of registration.

In terms of the regulations, the Commissioner will be satisfied that a person can reasonably be expected to make taxable supplies in excess of R50 000 in the 12 months following the date of registration where:

  • In the case of a person who has made taxable supplies for more than 2 months, such person has proof that the average value of taxable supplies in the preceding 2 months prior to the date of application for registration exceeded R4 200 per month; or
  • In the case of a person who has made taxable supplies for only one month preceding the date of application for registration, such person has proof that the value of the taxable supplies made for that month exceeded R4 200; or
  • The person is in terms of a contractual obligation in writing, required to make taxable supplies in excess of R50 000 in the 12 months following the date of registration; or
  • The person has acquired finance from certain specified credit providers, wherein credit has been provided to fund the expenditure incurred or to be incurred in furtherance of the enterprise, and the total repayments in the 12 months following the date of registration will exceed R50 000; or
  • The person has proof of expenditure incurred or to be incurred in connection with the furtherance of the enterprise as set out in a written agreement, and proof of payment or a payment agreement evidencing payment in the furtherance of the enterprise which has either exceeded R50 000 at the date of application for registration; that will in any consecutive period of 12 months beginning before the date of application and ending after the date of application, exceed R50 000; or will in the 12 months following the date of application for registration exceed R50 000.

With effect from 1 April 2014, a further category of persons entitled to register for VAT on the voluntary basis are persons that carry on an enterprise of a nature as set out by the Minister in any regulation (section 23(3)(d) of the VAT Act). The nature of the enterprise must be such that substantial costs are incurred which is only likely to result in the making of taxable supplies after a period of time. The Minister has only now published the relevant regulations on 29 May 2015, specifying the types of enterprises that will qualify for registration under this category. The enterprise activities provided for in the regulations include broadly: agriculture, farming, forestry and fisheries; mining; ship and aircraft building; manufacture or assembly; property development, infrastructure development and beneficiation.

Prior to these regulations having been issued, vendors seeking to register with SARS under this category have experienced practical difficulty in doing so as the regulations setting out the types of permissible activities were not yet in force. It is expected that provided vendors seeking to register under this category of registration comply with the regulations, that they should now have no difficulty in doing so.