When starting a new venture, the aspiring business owner has to be vigilant. Making mistakes is a costly way to learn. You can afford to pay such “school fees” if you have deep pockets and a sympathetic banker, but more often than not, the reason for the venture in the first place is a distinct lack of money.
Most aspiring businesspeople just can’t afford many mistakes. One common misstep is addressing value added tax (VAT) issues too late. Some businesses require costly capital items, such as special equipment, that are often vital. If these are bought on loan, the cost of VAT is enough to make a difference to the business.
If the equipment is very expensive, the business’s projected turnover would have to be high too, or the business will be in severe financial difficulty and might have to close. It’s only mandatory to register as a VAT vendor if the expected turnover is R1 million, but you can register voluntarily with less. Note that VAT registration isn’t a given. You have to apply for it and the requirements do change from time to time.
When starting your business, timing is vital from the VAT point of view. When you register your new business for VAT, you can retrospectively claim back the VAT you spent on its expenses from the SA Revenue Service (SARS). However, those expenses are only eligible if they were incurred less than six months before the registration. You also can’t claim back VAT on capital items. If you need to quickly buy a large machine, this can put you out of pocket.
Buying a farm can also be a VAT transaction. Although fixed property transactions are subject to special rules, if the VAT registration is delayed, VAT can be a potentially devastating additional cost. The message is clear: speak to a VAT expert before committing to buying capital equipment. If you don’t, you may end up footing the bill for the VAT.