What happens when you've paid Vat and a debt goes bad?
Most businesses are registered for Vat on the invoice basis. This means you have to pay your Vat over to SARS as per the sales invoices you've issued during a certain tax period. And you need to do this irrespective of whether or not those invoices have been paid. So what happens when you've paid over Vat on sales to your debtors, but some of those debts become irrecoverable? Do you lose the Vat? Read on to find out...
If you're a Vat vendor and aren't sure of what happens next when you pay over Vat on sales to your debtors, but some of those debts become irrecoverable, the Practical Vat Loose Leaf Service has got you covered.
Here's what you must do when you've paid Vat and a debt becomes irrecoverable
If you're registered on the invoice basis and have debtors, you won't know for a while if a certain debt will go bad. So you have to pay over the Vat in the meantime, even though this may cause a cash flow problem.
When you find yourself in an unfortunate position of having bad debts and all recovery methods have failed, you're entitled to claim the Vat portion of that debt back as an input tax deduction during the tax period that the debt was finally written off as irrecoverable.
You claim this input tax back by filling out block 17 on your Vat return.
Here's an example of how you'd do this: Let's say you sell a suit to Mr Yuppie for R2 280 and declareR280 (R2 280 X 14/114) as output tax in month one.
In month three, he pays R570 of the invoice and in month six you hear he's left the country.
In that month, you can claim R1 710 X 14/114 = R210 (the Vat portion of the bad debt) as input tax and the rest (the other R1 500) as an income tax bad debt.
What proof does SARS require for a bad debt?
According to the Practical Vat Loose Leaf Service, to date, SARS hasn't laid down any hard and fast rules!
But general practice requires that you must at least be able to show you attempted to recover the debt. SARS will also want you to show the tax period where you actually first paid the Vat over.
If you're registered on a payments basis, you can't make any claim as you only account for Vat as and when you receive actual payments.
If you've sold goods at a zero-rate and that account becomes irrecoverable, you can't claim any input tax on bad debts here either. After all, you charged the Vat at 0%.
What happens when you have claimed the input tax and then recover the debt?
You pay the Vat back, as output tax, by filling in block 12 on your Vat return for the period you recovered the money.
Well there you have it. Your claiming rights when you've paid Vat and a debt goes bad.