The rules regarding registration as a VAT vendor in SA are straightforward. The first rule concerns turnover. As soon as a business entity, be it a sole proprietor, a private company, small business corporation or regular private company (including a close corporation) reaches the R1 million mark in the course of normal trading it must register as a VAT vendor.
Similarly, if it’s clear the R1 million turnover mark is going to be achieved or exceeded within the normal 12-month trading period – then that entity must register as a VAT vendor. This is, of course, provided that the other rules relating to VAT registration are also complied with. This is in terms of Section 23 of the VAT Act.
The next rule is that the business activity has to be a ‘VAT-able’ activity. Transport of passengers and receipt of rentals of residential homes are excluded, for example, meaning even if such a business exceeds the R1 million threshold it cannot be registered for Value Added Tax. (For a full list of exempt activities, see Section 12 of the VAT Act.) There’s a perception
in the marketplace that a business which is VAT registered is more credible than one that isn’t.
In a business, VAT registration has the advantage that the VAT inputs in terms of most goods and services used by the business can be claimed. The disadvantage, however is that the addition of VAT on top of the service or goods offered by the business increases the overall cost borne by the end-user, who may not be VAT registered and so is unable to pass the cost on.
Not liable
Small professional firms that deal directly with the public have an advantage if they can remain non-vendors – they would then not be liable to charge VAT. The smaller business may well be tempted to split its operations among several entities in order to avoid VAT registration. The government, however, has put anti-avoidance rules in place to prevent this.
If you have several different lines or distinct services or goods, you might be able to avoid the VAT registration requirement by placing the different business units into different entities. Smaller operations, home businesses and the like may be able to use this technique to good effect. Another drawback of VAT registration is that it considerably increases the compliance burden in terms of tax. It costs a lot of money to keep the VAT affairs of a business up to date.
Heavy penalties
Should a business fall behind with the VAT compliance, there are heavy penalties. For this reason, in my view it is not a very good idea for a sole proprietor to be registered as a VAT vendor. Whereas you could, as a last resort, wind up a firm that has tax and VAT problems and, with luck, walk away from the mess, if the VAT registration attaches to you as an individual, that luxury isn’t there. Registration as an individual also may have ramifications in terms of estate planning and the taxes that have to be borne by the estate of the businessperson.
Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.
