A Deep Dive Into Value Added Tax for South African SMEs

For many people, tax is a tedious responsibility, and as an SME it’s imperative that you do your due diligence. There are different types of tax, one of them being VAT.

VAT can seem complicated, but it doesn’t have to be. You might be wondering if your SME has to register for VAT. Luckily, In this article, we’ll provide a deep dive into VAT to help you gain a deep understanding of what it entails and how to ensure your business is compliant.

What is Value Added Tax?

According to the South African Revenue Service (SARS), VAT is the abbreviation for Value-Added Tax. This is a form of consumption tax by the government that applies tax when goods and services are bought.

The products are levied at every stage, from the production stage to the distribution stage. VAT is also an indirect tax as the responsibility is placed on the consumer, however, they don’t pay it directly, like they would with a direct tax like income tax and taxes on assets.

How Does VAT Work?

It’s crucial to ensure you’re aware of all your tax obligations as an SME. VAT in South Africa is charged at two rates. A standard rate of 15%, and a zero rate of 0%.

Here’s how it works, let’s say you run a toy store and the toy supplier charges you R 100 per doll, the supplier will receive R 85 and the R 15 will go to the government as Output VAT. Then, if you sell your doll for R 195,50, R 25,50 will go to the government as Output VAT.

Which VAT Items Qualify for the Zero Rate?

Some items fall under the zero rate for tax. These items are:

• Exports
• 19 basic food items
• Illuminating paraffin
• Goods which are subject to the fuel levy (petrol and diesel)
• International transport services
• Farming inputs
• Sales of going concerns, and
• Certain grants by the government

What Are the 19 Zero-Rated Foods?

The 19 zero-rated foods are as follows:

• Brown bread
• Maize meal
• Samp and maize rice
• Dried maize and dried beans
• Lentils
• Pilchards/Sardinella in tins
• Milk powder
• Dairy powder blend
• Rice
• Eggs
• Vegetables and fruit
• Vegetable oil
• Milk and cultured milk
• Edible legumes and pulses of leguminous plants
• Brown wheaten meal

Which Goods and Services Are Exempt from VAT?

Apart from the items that are zero-rated, there are goods and services that are exempt from VAT. These goods and services are:

• Educational services provided by an approved institution
• Non-fee-related financial services
• Public road and rail transport
• Residential rental accommodation

Is There a Difference Between Zero-Rated VAT and Exempt From VAT

Yes, there’s a difference between the two. Exempt supplies do not fall under the taxable turnover and are completely excluded from VAT.

If your business makes supplies that are taxable but are zero-rated, you’re able to claim a deduction for what you spend on the VAT for the goods and services you buy to produce those supplies. But, if you produce supplies that are exempt from tax, you’re unable to claim or even register for VAT.

Who Registers for Value Added Tax?

There are two options regarding registration for VAT vendors, which are:

Voluntary registration for VAT: You can take the plunge and register for VAT if your business has had an income that exceeds R 50 000 in the past 12 months.

Mandatory registration for VAT: This is when your business has made an income of over R 1 million for the past 12 months. When this happens, you are compelled to register for VAT. SARS requires that you make an application for VAT within 21 days from the day your turnover exceeds 1 million rand.

How to Register for VAT?

You can register for VAT through the following methods:

Can I Cancel My VAT Registration?

Yes, you can! If the value of your businesses taxable supplies will be less than R1 million in a period of 12 months, you may apply in writing to cancel your VAT registration.

Your VAT registration may be cancelled by the commissioner when:

• Your enterprise has ceased operations and will not commence again within the next 12 months.
• Your enterprise never started operation or will not operate within the next 12 months.
• Failure to comply with the requirements for compulsory or voluntary registration.
• Failure to provide a return that is required to calculate VAT, or
• You were registered under a voluntary registration and;

You have not availed a place of business, do not keep updated accounting records, you have not opened a business bank account, or your business was previously registered under the VAT Act or Sales Tax Act and failed to comply with regulations under that act.