Most small, or new businesses avoid or delay registering for VAT, until they absolutely have to.
When do you have to register for VAT? When your turnover reached R1 million in a 12 month period. (This is the main indicator, but there are other considerations and exclusions)
In theory, VAT is a very fair tax and a benefit to a business. Once you are registered, you add 15% on top of all your invoices and get 15% more money in your bank. Then you look at all the expenses you pay, deduct any VAT you paid, and then pay SARS the difference. So you received 15% more income and then pay SARS only a portion of that.
If you are looking to purchase an asset, you could then claim that large deduction and sometimes it results in a VAT refund. If you finance an asset, you also get the VAT back upfront in full (note this does not apply for passenger vehicles, even if registered in your business name, only vehicles with no back seats)
So why would businesses want to delay this registration?
• Registration costs money if you get an accountant to help you, or it’s a tedious process for you at the SARS office. Usually more than one trip if you do it yourself.
• Once you are registered your bookkeeping has to step-up. It’s a strict timeline of every two months, with calculations correct to the cent. There are no quick VAT calculations. You really should then start using a proper bookkeeping program, if you weren’t already.
• It’s a paper chase and admin issue, making sure each invoice received is compliant. If you pay VAT but your invoice doesn’t reflect your business name and VAT reference, SARS can reject the deduction.
• You may not be in a position to increase your prices by 15% especially if you are already market related or competitive, and your customers are not corporate companies. There is only so much you can charge for a cup of coffee, and being 15% more may not be an option. If you don’t increase your prices, then the VAT payment becomes an expense to you, rather than a benefit.
• Once you are VAT registered you probably need more regular accountant advice, so additional accounting fees.
There may be times when registering voluntary (before you reach R1 million turnover) may be advisable, so you need to chat to your accountant and consider all the benefits. But to just avoid VAT registration outright at all costs, is not always the best option.
If one of the following apply to you, have the conversation with your accountant (or me!) and see if you can benefit from being VAT registered (note that you have to have income of at least R60,000 in a year, before you are allowed to voluntarily register) :
• If you can add 15% to your income (for instance, if more of your clientele are businesses that are already VAT vendors, it will have no impact on their overall cost)
• If you are planning a large asset purchase of vatable goods (not a passenger vehicle)
• If most of your expenses, overheads and supplies already include VAT. You’re paying it already now you will be able to claim the deduction
• If you import goods. Pay attention to that large customs VAT charged on your invoice, which will now become a deduction. It could affect your costing and result in more competitive pricing, or more profit.
There are so many more considerations, but hopefully you have a better understanding of VAT and if you want to discuss it in detail, get in touch with your accountant, or me! And make sure you are not losing out on a little more cash flow.