Entity stopped operating business - tax effect?

[J7J]

Hi,

A client of mine has decided to stop their main business operation (letting dvd's). Subsequent to that, they only had small expenses going through their books (Repairs and Maintenance to get the shop back to original state, bank charges etc...).

I have 2 questions:

1) Can input VAT still be claimed on these expenses, even though they have stopped operating and no income is generated?

2) Can these expenses be deducted for income tax, as the taxpayer's intention is no longer to make profit (as they decided to close the shop?)

Any advice will be appreciated.

[Mike Simmonds]

Was your client registered for VAT? Were VAT returns submitted and any Input VAT claimed?

[J7J]

Was your client registered for VAT?

Yes, they were registered when they were operating and are still registered for VAT.

Were VAT returns submitted and any Input VAT claimed?

Yes, VAT returns were submitted and all Input VAT was claimed.

[Mike Simmonds]

The rule regarding Input tax is that "the goods or services supplied must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies", therefore based on the fact that there will be no Taxable Supplies (Output VAT), you cannot claim the Input VAT.

However I would claim the full expenses including VAT for Income Tax purposes on the Income Statement. Hopefully this will reduce the taxable income and at worst add to the assessed loss that may be present.

[J7J]

The rule regarding Input tax is that "the goods or services supplied must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies", therefore based on the fact that there will be no Taxable Supplies (Output VAT), you cannot claim the Input VAT.

Chances are good that they will sell some/all of the assets to a willing buyer, on which Output VAT will be payable. Does this change the scenario as such so that they can claim input VAT on the expenses in the meantime?

[Mike Simmonds]

I would at the time a VAT return is completed for the sale of assets then claim the inputs. It may not be 100% correct on all the expenses, but considering the fact that you claim inputs up to 5 years after the fact, I really don't think SARS will have any issues.

[J7J]

Thank you for your input, Mike. I really appreciate it.