We have such a fear of the tax man that we would rather err on the side of self-prejudice that to claim what is rightfully ours from the system and making VAT (Value Added Tax) work for you.
Another major reason for fearing the VAT system is that you regularly hear of businesses that have been closed due to non-compliance with the VAT system. Being a tax practitioner, I get to see the other side of these stories. Especially where things have gone wrong in a business. It is a story that is as old as time, where business owners become tempted to use VAT to cover their operating expenses during a cash flow crisis and when SARS realise that you have withheld VAT they come knocking. You should also know that your business can be closed down for non-compliance with any tax regulation.
VAT is one of the most underutilised levers to grow your business. So, how can the system increase the profitability of your business? Firstly, a properly managed VAT system will never land you in hot water.
You can voluntarily register for VAT after you have issued at least R50 000 worth of invoices, or where large capital expenditure is planned. It is compulsory to register for VAT when your business issues more than R1 million in invoices per year, failure to register is viewed as non-compliance.
VAT is added to your invoices, this means that if you previously charged R100 for an item or service you should now charge R115. Many people that I have met have the misconception that SARS is going to take 15% of the price that they charge a customer and feel that they are going to lose money by registering for VAT. This is called output VAT.
When you make purchases from a VAT registered vendor you will also be paying VAT, but should those expenses be incurred in the production of income (legal talk for saying if you use the products or services in the business) you are entitled to claim the VAT that you paid back from SARS. This is called input VAT.
At the end of every VAT cycle, normally every 2 months, you tally up all the output VAT charged to customers and deduct qualifying input VAT paid and the difference needs to be paid to SARS.
The secret in making VAT work for your business is to pay output VAT on the earliest of invoicing or receipt of cash. That also means that you can claim input VAT when you received a VAT invoice from a supplier, even though you have not paid them. By managing this cycle, you will reap the first benefit from the system – receiving your VAT inputs before you need to pay the VAT outputs.
“You will be surprised after calculating how much interest you could earn in a year. If managed properly it could be a significant contributor to a large bonus in December!”
The next important step you should consider is what you do with the VAT after receiving it from a customer. A simple hint is that you should immediately transfer the money into a high interest account. There are many investment accounts that yield higher interest than a regular savings account. This is important as you will be leveraging SARS’s money while it is in your account to earn an additional income, for which you did no extra work. The same principle applies for PAYE, UIF and SDL. You will be surprised after calculating how much interest you could earn in a year. If managed properly it could be a significant contributor to a large bonus in December!
Reducing fixed and variable expenses
The last important factor that you should know about, is that if you are currently not registered for VAT your profitability could increase with up to 15% after registration. The reason is simple: Much of the expenses that you already pay each month has VAT on it, and after registering you will be entitled to claiming 15% of all qualifying VAT back on these expenses. Therefore, many of your expenses will reduce with 15%! I would like to see where else you can achieve such an immediate increase in the effective nett profit without large capital expenditure or staff recruitment.
Think out of the box when it comes to actively managing your cash flow, making VAT work for you and profitability. The key to lasting success is to work with qualified advisors to grow your business.
Frans van Eden, AGA (SA) is MD of Prioritse, specialising in tax planning, insurance, financial advice, accounting and corporate structuring. Email firstname.lastname@example.org to arrange a free consultation. www.prioritise.co.za