VAT and deposits

[duncan drennan]

If a deposit is paid, and then a VAT date occurs between the deposit being paid and final invoicing is any VAT due on that date?

[Dave A]

For smaller vendors, VAT can be calculated based on one of two methods:

Accrual method: This is based on when the transaction takes place regardless of when it is paid. Essentially, this is the date of invoice.

Payment date method: This is based on the date of payment!

If you go for the cash basis, this has to be requested and approved by SARS first when making application to become a vendor. The default is the accrual method.

Under the accrual method, this means the liability for VAT is incurred at the time of the invoice. Thus deposits received are not considered VAT events.

[duncan drennan]

Thanks Dave, so why would anyone prefer the payment date method? Surely from a cash flow perspective the accural is better? (unless you are a compulsive spender )

[Dave A]

We aren't all so lucky to get our money in advance of the invoice!!!

The scenario that illustrates the advantage of the payment date basis is where you get paid by your clients at 60 to 90 days, but you pay your suppliers COD. Your money is coming in only after you would have to pay SARS under the accrual system.

The cash basis does come with its challenges, particularly in terms of record keeping to the satisfaction of SARS. Also, accounting systems work on the accrual basis in all other aspects.

I know Quickbooks can handle the cash basis for VAT as an option, but I don't know about other accounting software.

I also vaguely recall there was talk of doing away with the option.... And I'd hate to try and convert from one system to the other.

[duncan drennan]

I also vaguely recall there was talk of doing away with the option.... And I'd hate to try and convert from one system to the other.

I assume you mean the cash basis option?

I actually wasn't thinking clearly - obviously the cash basis is better! Then you only have to pay once the money is in the bank If in invoice is payed late on the accrual system then cash flow is an issue.

I assume with the accrual system you can claim input VAT as soon as you have the invoice (invoice payable that is), and on the cash basis you can only claim the input VAT once it is actually paid?

[Marq]

As far as I know the cash option has been removed and will only be accepted in special cases - which means effectively no more cash basis unless you run a government department and contemplating looking for excuses for qualified audit reports.

[Dave A]

Marq's certainly right about it being difficult to get registered on the cash basis.

Actually, it's not all that much fun trying to get registered full stop. I recall submitting a tome of about 150 pages for each company with all their documentary requirements. But then I've got trusts and (Pty) Ltds, so that was part of the problem.

You should have seen the look on the face of the Commisioner of Oaths that had to certify the copies of that little lot. He disappeared after about 5 minutes and I had to run around to find another one to finish the job.

[Marq]

I enquired not to long ago, with sars up at Mt Edgecomb, about deregistering one of my cc's as I was no longer interested in contributing to their vat service. I just wanted to know the procedure, forms, repercussions etc.

The advice I received from the helpful lady behind the counter was to keep plugging away every second month with the returns because that was going to be far easier than talking to the guys who they would send down to investigate and audit my business. She intimated that I should get into the situation where I had filed about six nil returns then perhaps they would lose interest in me and I could lodge a form SARSAVOIDIT and go away quietly. She did not even put out one those royal back salute hands so I was really impressed.

It seems that one of their "random who gets an audit" programme selection criteria are the deregistering companies. They "need" to determine as to why you made all those "losses", claimed all that money from them and then decided to duck from their system. (Not that I was doing that, mind you - I was just using that as an example - you know)

So unless your business really is going down the tubes and you could not care about a sars employee drinking your coffee (cause you would look after him wouldnt you) - beware.

Once you are on the system there is a facility on their NITS system to check your vat returns to your income tax returns - be careful that the sales numbers on your returns look similar to your income tax declared turnover.

Unless you have some sound reason to register for vat besides the turnover number reaching the R350,000 number (I think thats what is - havn't looked for a while), my thought on this is to try and split your income over two or more concerns and avoid getting into their clutches.

I must say - at least I am forced to keep my books right up to date and not just manage cashflow from my bank statement, receivables and who I think I should pay this month. So its not that bad after all. (who am I kidding - I hate forms)

[duncan drennan]

I assume with the accrual system you can claim input VAT as soon as you have the invoice (invoice payable that is), and on the cash basis you can only claim the input VAT once it is actually paid?

Just to go back to this, is the above correct?

[Dave A]

Just to go back to this, is the above correct?

Spot on, Duncan. To avoid confusion:

On the normal (accrual) basis, you base your output tax and input tax on date of invoice.

On the cash basis, you base your output and input tax on the date of payment.

No mix and match to please I'm afraid.

Interesting point, Marq. Another sure way to invoke an audit is to claim a VAT refund, I hear.

[duncan drennan]

Interesting point, Marq. Another sure way to invoke an audit is to claim a VAT refund, I hear.

Theoretically an audit should never be an issue though...

But seriously, the theory should be that there is not too much to update, but inevitably there is much flapping and running around when SARS lets you know they will be visiting.

Are there any businesses out there who's house is actually in order (only minor tidying before the guests arrive)? My (second hand) exprience is that there are not many - so why is that?

[Dave A]

Personally, I'm pretty confident, but I have to suffer an annual audit anyway from my auditors who are pretty thorough. It's the lost time and disruption that would bug me and I don't see the sense of invoking a mandatory audit when good planning could avoid it.

As for most businesses not having their records in order - There's a topic for a new thread if ever I saw one.

[Marq]

No refunds are fine (well I hope so cause I do them on a regular basis) as long as your paperwork is up to date and there is no outstanding stuff ) they repay fairly sharply - As long as you don't do losses/claims on an ongoing basis - pay some in and claim some, you're ok. How you manage this depend on your accounting and timing abilities.

Sars assumes and gives leeway for losses from time to time but at some stage they will marry the whole lot up and say "how is this business funding itself". So if you continue to claim (assume business trading normal ) you are making a loss - check out income tax side - whats being declared. I believe the track record is set at 5 years. If you make losses beyond this, the levels of tolerance are reached and the audit kicks in to check out how your operation is managing to make ends meet.

Duncan - audits are always a potential and the other side of life is that the paperwork is never properly in place....with me it's a case of a cobbler never mending his own shoes...with most business orientated guys, I think it's a game of cat and mouse. Its that we enjoy the chase stuff that somehow doesn't involve boring paperwork until later and then it's this oh oh reaction.

So...in theory...haha..this paperwork isn't a problem - but juggling the books (legally of course) to make sure we make a buck......well there's the rub.

Be Consistant, be Careful, be Creative - three C's for your partner, the sars (small letters - no caps)...thats the way I see it..your small partner...whether you like it or not - he is there taking his cut for the good of the Country and building a better life for all....let him in now and again but keep him at bay treat him as hostile and a threat at all times.

[Dave A]

Maybe SARS has got used to you.

There was a time if I bought a commercial vehicle, I qualified for a refund. I'd get a call from SARS asking me what the "unusual" capital input tax claim was for, and to fax through the tax invoice.

As I said earlier, when it was announced that SARS would be auditing more regularly, I heard that one of the triggers was going to be when there was a refund claim. But then, the theory was that they were going to do a VAT audit on everyone on a five year cycle, but there's no sign that it's happening.