Cameron owns two companies. One's a guesthouse and one's a restaurant. Both companies are registered for VAT.
Problem is, the restaurant isn't doing well, so Cameron closes the business and sells the assets. On 1 September 2014, he bought the remaining assets from the restaurant for the guesthouse and paid the invoice amount of R17 100. This price includes VAT.
Cameron submitted the VAT201 returns for both businesses for the tax period ending October 2014. The restaurant had a liability of R2 100. The guesthouse claimed a refund of R3 500.
But, SARS returned the VAT return for the restaurant explaining that the company had been deregistered for VAT purposes.
Cameron resubmitted the return together with a letter in which he objected to the decision to deregister the company. Read on to find out the outcome...
Do you know how to handle the VAT in these situations?
How to treat VAT you paid on bad debts;
Correctly charging VAT on the sale of a going concern; and
VAT and real estate/buildings/levies/transfer costs etc.
The ordinary VAT rules don't apply!
Here's what you need to know…
SARS didn't stop here, here's what they did next…
At the same time SARS did an audit on the guesthouse's VAT return for the tax period. The SARS auditor queried the particular invoice issued by the restaurant as records showed the restaurant was deregistered as a VAT vendor.
Cameron explained he hadn't asked SARS to deregister the restaurant and forwarded a copy of his letter of objection.
The auditor also performed an audit of the restaurant. This gave rise to an additional query. There was a discrepancy between the invoice issued to the guesthouse (Inv. No. 18612) and the previous invoice recorded in the books of the restaurant (Inv. No. 9979). It was assumed that 8 632 invoices might not have been accounted for (18612 – 9979 –1).
All this could have been avoided, except Cameron made one mistake
Cameron realised he had made a mistake as the last invoice was incorrectly numbered. The previous invoices were till slips whereas the last invoice was generated on his computer. Failing to admit his mistake, he explained he couldn't find the till slips. He went on to say they consisted of nominal amounts for the sale of cold drinks, etc. to staff members after the business had stopped trading. The SARS auditor didn't accept this and insisted on seeing the invoices.
SARS then raided the business premises, the guesthouse, Cameron's accountant and his home office. They then issued assessments to both the guesthouse and the restaurant and disallowed all claims for input tax from the initial date of registration for VAT. The assessments amounted to more than R3 million in total, which included additional tax of 200%, penalties and interest.
SARS said Cameron:
• Had represented he'd paid VAT while his other company had failed to declare the same;
• Issued invoices and charged VAT while deregistered;
• Applied for the restaurant to be deregistered for VAT; and
• Couldn't produce the missing invoices.
All it takes is just one mistake for SARS to deny your input tax claim and slap you with penalties and interest!
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SARS assumed everything else was wrong too
SARS took the stance all previous claims could also be wrong due to the above discrepancies and decided to disregard all previous claims for input tax
The above events took place over three years from the initial query. SARS didn't give Cameron a proper inventory of items they took off his premises. This made matters worse as certain documents went missing during the raid.
SARS also took documents belonging to several of his accountant's clients, watches, foreign coins, cell phones, cash in the safe, cash in the tills, cash Cameron had in his pockets, etc.
Ironically, SARS later realised they were entirely to blame for deregistering the restaurant and had incorrectly initiated all actions in this regard.
Despite this fact, which was perhaps the main reason for these events, SARS refused to withdraw the assessments. Cameron incurred costs in excess of R200 000 to defend this matter and after three years he continues his struggle to survive emotionally and financially. Overwhelmed by uncertainty and unable to meet the enormous tax debt, Cameron reluctantly decided to close the guesthouse.
This was a costly lesson as he has now lost both his companies. Don't make the same mistake.
Having a clean VAT audit is easier than you've ever imagined... Click here to find out what SARS looks for.