We have recently experienced a high number of audits and reviews from SARS on VAT returns submitted. The questions asked during these audits and reviews are usually valid and aimed at establishing whether the claims submitted for input VAT should be allowed.
Previously the focus of audits and reviews was mainly the validity of tax invoices, but SARS has decided to re-visit and re-think their strategy.
As VAT vendors and tax practitioners we need to do the same.
Let’s start with a quick look at the relevant legislation. Section 17 of the VAT Act determines that a vendor may only claim input VAT on the portion of the claim that was used to make taxable supplies. If more than 95% of the claim was used by the vendor to make taxable supplies, the whole amount will qualify for an input tax claim. But if less than 95% of the goods or services are used to make taxable supplies, then the input tax needs to be apportioned. No input VAT can be claimed on certain specific expenses, for example entertainment and in respect of passenger vehicles. A vendor may not claim input tax on private expenses. If the expenses are used for business and private use, only the portion of the VAT attributable to the business expense can be claimed as input tax.
When apportioning an amount to calculate the input tax that may be claimed, the most commonly used formula is the turnover based method. A vendor needs to obtain permission from SARS if he wants to use another method. The formula requires a vendor to calculate the ratio as follows:
Taxable supplies / Sum of all taxable and exempt supplies, as well as all other income received or accrued during that period x 100.
This ratio can be used for instance if the vendor has a property that consists of shops as well as flats. The letting of the commercial properties is a taxable supply, while the letting of the flats (residential properties) is exempt. If this vendor gets a single bill for electricity he will need to apportion his input tax using the formula.
If the private use is not specified, the vendor needs to estimate the percentage of private use.
During a recent VAT audit the first question asked by the SARS official was whether the enterprise was operated from the vendor’s residential address. Since this was indeed the case, SARS proceeded to question the percentage added back (or apportioned) for private use of the following:
When a vendor claimed input tax in respect of more than one cell phone, the vendor was requested to provide the following:
- The full names and identity number of the user,
- The duties performed by the user, and
- Which numbers (s) are used for private purposes.
SARS reviews of VAT returns have gone way beyond checking whether invoices for input tax are valid. We need to re-visit and re-think every input tax amount that we want to claim from SARS.
Look out for our article on fringe benefits. And while we are on the topic of VAT, don’t forget to declare the VAT on fringe benefits, such as right to use of asset.
Please feel free to contact your portfolio manager if you require a discussion on this topic.
Petro van Deventer