Compulsory Vat registration threshold last increased in 2009

The compulsory threshold for value-added tax (Vat) registration has been R1 million for the past 16 years. If it had kept pace with inflation, the threshold would have been in line with global practices of closer to R2 million.

This means a very small business with a turnover of about R83 000 per month must keep meticulous records and ensure its accounting systems are current to avoid penalties for late payments or accounting errors. 

Large businesses exceeding annual turnover of R30 million must file a Vat return monthly. This threshold would have been closer to R210 million if it kept pace with inflation.

Charles de Wet, tax executive at ENSafrica, says the threshold for compulsory registration started at R150 000, was increased to R300 000 and increased to R1 million in 2008 (effective in 2009) for the last time. 

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Cash flow implications

The minimum threshold for voluntary registration of R50 000 should have been more than R100 000 by now. “The point is a company that exceeds the R1 million threshold is very small. Besides having the administrative burden of filing Vat returns bi-monthly the cash flow implications are quite harsh for such a small business.”

The cash accounting method is only available to a sole proprietor and not to a company, no matter how small. Companies account in terms of the accrual (invoice) system.

Small businesses conducting business with the government must pay Vat on an accrual basis, putting them under tremendous cash flow pressure. The problem, says De Wet, is that government is not known for the timeous payment of goods and services.

“Even though a small business is not paid for months on end they still have to account for the Vat to the South African Revenue Service (Sars).”

According to SME South Africa, a small business usually has 50 full-time employees and an annual turnover of R6 million, while a “very small” business typically employs 20 full-time employees and has a turnover of R1 million per annum. A medium-sized business has an annual turnover of R13 million. 

Rupert Oberholzer, tax practitioner at Pro-Accounting, says an annual turnover of R6 million for a small business is a “good guideline”. 

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Input Vat 

“A lot of people think when you start a business, you should register as you can claim a lot of input Vat if you have to acquire assets. But that will only be a once-off,” says Oberholzer.

The principle behind Vat is a 15% tax included in the output amount (price or fees) to be paid to Sars. But input Vat is only claimable for specific expenses.

The biggest expense for most businesses is salaries. Input Vat cannot be claimed for salaries, wages or allowances. 

Oberholzer also points out that accounting and administration are much more complex and costly as the business must either use an accountant or understand the Vat rules to avoid penalties if Sars audits it and finds mistakes. 

He says it is “difficult” to see why the thresholds have not been increased over the years. “I think it is because the threshold is applicable to all industries.”

Businesses that provide professional services, such as medical doctors, accountants, and engineers working solo, will mostly have a turnover of over R1 million. “It is a nice income stream for Sars and if the threshold is upped to R2 million or higher, a lot of these business will be able to deregister for Vat,” Oberholzer adds.

De Wet also notes that although a business can claim input Vat when buying goods from registered Vat vendors, personal service companies have limited opportunities to claim any input Vat.

From a Sars perspective, the opportunity for fraud increases with the higher number of Vat vendors. The burden of ensuring compliance is not only high for the business but also for Sars. 

If National Treasury considers increasing the Vat thresholds during the Budget Review in February, it should consider increasing the R50 000 threshold for voluntary registration to R100 000, the compulsory registration threshold of R1 million to R2 million, and the R30 million for monthly filing to more than R200 million.

This article was republished from Moneyweb. Read the original here.