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How Vat works in your everyday business life

by , 23 January 2014
Value-Added Tax (Vat) affects all of us. We pay Vat on things we buy every day. But how does Vat work when you're running a business? Let's find out.

In its simplest form, Vat is nothing more than a tax levied on the supply of goods or services. It's also levied on the import of goods and, under some circumstances, on the importation of services.

In this article we gave you a basic rundown and theory of Vat; now let's take a closer look at how it works in practice, and how you'll encounter it in your business..

Vat works as follows when you're running a business

Let's start at the very beginning, with registration.

Who's required to register for Vat?

Not everyone is required to register for Vat, but for those who are, there are two types of registration:

If you qualify for either compulsory or voluntary registration, you must apply to SARS using form VAT101.

Invoices: The key to smooth Vat operations

It's incredibly important that you get the invoicing in your business right to optimise your input tax claims and stay legal.

How do you account for Vat?

SARS provides two methods for you to account for Vat: On the payments basis and on the invoice basis.

If you account for Vat on the payments basis, it means you must account for output tax (the Vat you charge to your customers) as you receive payment. Similarly, you only claim your input tax when you've actually paid your suppliers.

Important: The payments basis is ONLY available to individuals (sole traders) and partnerships where the partners are natural persons. Their total income in a 12-month period must not have exceeded R2.5 million.

Public authorities, municipalities and associations that don't trade for gain may also account for Vat on the payments basis, but the turnover limit of R2.5 million doesn't apply.

If you're accounting for Vat on the payments basis because you're registered as an individual or partnership, and your total income exceeds R2.5 million, you MUST notify SARS to effect a change to the invoice basis, says the Practical Vat Loose Leaf Service.

All other Vat registrations are according to the invoice basis. This means you must account for Vat:

  • Either at the time your invoice is issued; or
  • At the time you receive payment for the supply, whichever occurs earlier.

The bottom line: Vat is an important source of revenue for the fiscus. SARS takes Vat compliance extremely seriously and will clamp down hard on any mistakes or oversights.

So make sure you're always compliant now that you know how Vat works when you're running a business. You can read this article about the next phase of Vat which is the Vat return.

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