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Thread: Section 67 of the Value Added Tax Act

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    Section 67 of the Value Added Tax Act

    Hi Guys,

    I have a small business that tenders for contracts with the Western Cape Government and in particular the Department of Health. We supply the hospitals with various food items which we procure from various wholesalers and retailers. Our contracts with the Department of Health are once off contracts as well as term contracts. We registered for VAT in November 2019. We informed the hospitals that we had been registered for VAT and that we would be charging VAT on all our invoices from the date of registration. This is according to Section 67 of the VAT Act which clearly states that VAT becomes payable by the clients of vendors from the date the vendor becomes registered for VAT irrespective of when the order or contract was awarded. The Department of Health is refusing to pay VAT on our Tax invoices claiming that our contracts were awarded prior to us being registered for VAT and that their internal policies and processes does not allow them to change the value of a contract once it has been awarded. We have raised the matter with various SARS officials who simply does not want to assist us in this matter.

    Could anyone please share some advice as we are not able to complete the output value on our VAT201 forms correctly due to our invoiced totals and our income totals don't balance (because of the 15% VAT not being paid).

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    I was feeling this one over from the point of financial effect to your company.

    Bearing in mind that pre VAT registration you had to provide for the expense of VAT from your suppliers, and once VAT registered your VAT liability is Output VAT less Input VAT, how has the invoice total changed once VAT kicked in?
    Are you just raising 15% on the pre-VAT-registered value?

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    Quote Originally Posted by Dave A View Post
    I was feeling this one over from the point of financial effect to your company.

    Bearing in mind that pre VAT registration you had to provide for the expense of VAT from your suppliers, and once VAT registered your VAT liability is Output VAT less Input VAT, how has the invoice total changed once VAT kicked in?
    Are you just raising 15% on the pre-VAT-registered value?
    Hi Dave,

    Thanks for the feedback. Pre-VAT we paid VAT on purchases and did not charge VAT on supplies. Post-VAT we are required by law to raise VAT on all our invoices and this is where the problem exist. When we tendered for the contracts our quotation clearly stated that we were not registered for VAT. It is therefore a given that if we do get the contracts we would not be able to charge VAT on the supplies until such time that we do get registered for VAT. From a government perspective, they are not paying VAT on their purchases for these contracts but they should make provision should the vendor register for VAT during the term of the contract. The Western Cape Government are of the opinion that they should not pay VAT on contracts awarded prior to the vendor being registered for VAT and because most of our contracts are term contracts, we supply the hospitals on a partial basis and hence we raise invoices as and when we do the supply. in our case, the contracts were awarded pre-VAT and the supplies are made post-VAT. However, Section 67 of the Value Added Tax Act is very clear in terms of the vendor's responsibility regarding the collection of VAT but the client is still refusing to pay VAT on our supplies. This has put us in a very compromising position, we have been made non-compliant by SARS and are therefore now not able to procure any work from the same government (so much so for promoting small business).

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    Quote Originally Posted by Nazir View Post
    From a government perspective, they are not paying VAT on their purchases for these contracts but they should make provision should the vendor register for VAT during the term of the contract.
    I suspect the client's point of view is it is you that should have provided for the fact that your VAT status was going to change. Every government tender I've seen requires a final figure inclusive of VAT. (And be honest with yourself here - have you been charging the full awarded tender rate?)

    Also bear in mind for most government departments VAT is just an ordinary expense as they do not raise output VAT and cannot claim input VAT. When you supply a VAT vendor and they can claim your VAT raised as Input VAT, the actual cost to them doesn't change as your VAT status as a supplier changes. Not so with most government departments. It is a real cost that materially affects budget allocations and awarded tender values.

    Quote Originally Posted by Nazir View Post
    This has put us in a very compromising position, we have been made non-compliant by SARS and are therefore now not able to procure any work from the same government (so much so for promoting small business).
    Nothing prevented you from raising the same quantum, but inclusive of VAT. I did some quick calcs and the actual financial effect on you is dependant on your markup... And it's kinda a vicious circle. The greater the markup, the greater the effect, but it is always substantially less than the markup.

    Can you scale up to overcome the overall margin shrink?
    Or should you cancel the contract and submit new tenders?

    These decisions are in your hands. And obviously defaulting on your SARS obligations and defaulting on contracts are poor options.

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