Clarifying how and when VAT becomes applicable to a new VAT vendor.
SAICA members often request guidance relating to the Value-Added Tax (VAT) consequences once a person has been registered by SARS as a vendor. This guidance required is not related to the fact that the person now will have to levy the tax and issue tax invoices, but is more aimed at the making of deductions in respect of goods or services acquired prior to registration.
One of the first issues faced will be to determine the date at which a person will commence being a vendor, as this determines the date from which the person will be required to charge output tax on supplies made. This is not to be confused with the fact that SARS may not immediately register the person as a vendor on receipt of the application, and may only notify the person later of the fact that he/she is registered.
It is important to note that it is only where the application to be registered was made under section 23(2) and (3), that SARS can determine the effective date from which the person will be a vendor. For these applications, the effective date will therefore be determined from the document received from SARS confirming the registration.
For what is commonly referred to as compulsory applications, the effective date is at the end of the month when the total value of taxable supplies made by the person exceeded R1 million (or at the beginning of the month where there are reasonable grounds for believing it would exceed that amount). We are not considering the instances where the registration was in terms of section 23(4)(b). In the rest of this article, this date will be referred to as the effective date. (Note: all references to sections are to sections in the Value-Added Tax Act).
Consequence of registration
As already indicated, the person must levy output in respect of all taxable supplies made on or after the effective date. It is with regard to the ability to make deductions of input tax that members require guidance on. To the extent that the tax is input tax (as defined), there is no question that the taxes in relation to supplies made, on or after the effective date, by other vendors to the newly registered vendor, may be deducted.
Supplies made to the person prior to registration
The guidance that members require relates mainly to supplies before the effective date.
The fact that a person becomes a vendor means that a change in the use of previously acquired goods or services takes place and that an adjustment could be considered. The relevant provision is contained in section 18(4) and the requirements are as follows:
- Goods or services were supplied to or imported by a person.
- Tax has been charged in respect thereof. (This implies that goods or services acquired from non-vendors would be excluded).
- No deduction has been made in relation to those goods or services. (Because these goods and services were acquired before the person was registered, he/she could not make a deduction of the tax – also refer to the comments made later).
- The goods or services are applied in any tax period by the person (now the vendor) wholly or partly for consumption, use or supply in the course of making taxable supplies. (Of course, if a deduction of input tax is denied in terms of section 17(2) – such as in respect of a motor car – this would not apply.).
It is clear from these requirements that the goods or services must be ‘on hand’ at the effective date. If, for instance, the tax related to goods or services acquired and sold prior to the effective date that have been fully consumed prior to the effective date, the change in use would not occur.
It is important to note that the tax charged in respect of these goods or services will not be input tax (as defined). In terms of the definition in section 1, the tax will only be ‘input tax’ if it is the tax charged by a supplier on the supply of goods or services made by that supplier to the vendor. In the context of VAT, it therefore means the recipient must be a vendor. The tax levied on supplies made by a vendor to a recipient prior to that person being a vendor, is therefore not input tax. Section 16(3)(f) however, allows for a deduction to be made if the requirements of section 18(4) (as discussed above) are met.
The deduction will be the amounts calculated by applying the formula in section 18(4). The amount will in principle be the tax fraction (currently 14/114) applied to the lesser of the adjusted cost of acquisition, or the open market value of the goods at the time of being registered as a vendor. This amount has to be adjusted with the ratio of taxable use [section 17(1)] and if the goods are second-hand goods to the extent that payment was made.
The adjusted cost is basically the tax inclusive cost of the goods or services acquired prior to, and on hand, on the effective date.
Section 16(2) requires that the deduction of input tax can only be made if the vendor is in possession of documentary proof, acceptable to SARS, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished.
Section 16(2) refers to input tax, but SARS indicated in Interpretation Note 49 that section 16(2)(f) relates to the deduction referred to in sections 16(3)(c) to (n). In other words, it also refers to the deduction to be made in terms of section 16(3)(f) (referred to above). From Interpretation Note 49 it is clear that the acceptable documentary proof will be a tax invoice (used to determine the adjusted cost) and documentary proof of the open market value. SARS states in this Interpretation Note that the term “tax invoice” includes a document issued by the supplier in compliance with section 20(7).
The Interpretation Note allows, in instances where any of the documentation set out in the Note cannot be obtained, that SARS may, in terms of section 16(2)(f), consider the circumstances of that vendor, and allow alternative documentary proof to be obtained and retained by the vendor to allow a deduction specified in section 16(3) (f).
A question that commonly arises with respect to the tax invoice referred to above, relates to the ‘VAT registration number’ of the newly registered vendor. It should be quite clear that, in respect of supplies made prior to the effective date, the “full tax invoice” issued by the supplier could not contain the VAT registration number of the recipient. This is simply because the recipient was not a vendor at that point in time. The legislation recognises this, as proviso (i) (ee) to section16(3) states that a deduction may be made, notwithstanding the documentary proof that the vendor must be in possession of in terms of section 16(2).
The newly registered vendor can therefore make a deduction of the taxes in respect of goods or services acquired prior to him/her being registered as a vendor, if these goods or services are applied in any tax period by that person (now the vendor) wholly or partly for consumption, use or supply in the course of making taxable supplies. It must be remembered that this deduction must, in terms of in proviso (i) to section 16(3), be made within five years from the effective date.
Author: Piet Nel CA(SA) is Project Director: Tax, SAICA.
To complete your CPD questions for this article, please click here