By Lindi Jonker
As accountants, we have noticed over the past years a significant increase in VAT and Income Tax verifications and audits conducted by SARS. These reviews and audits are not limited to the refunds due by SARS but includes returns where payments have been due and paid over to SARS.
A verification is simply a SARS “desk audit or examination” of relevant and specific documents or other relevant material requested by SARS from the taxpayer that they may provide either in writing or orally. A deadline is given for the provision of this information and documentation. Depending on the findings, SARS may either accept the documentation or start an audit and may even simultaneously conduct a criminal investigation.
The audit on the other-hand, can be conducted at SARS offices, electronically or as often the case, at the taxpayers’ premises where SARS will examine accounting records and original documents over a specified period.
The processes of either a verification or audit or criminal investigation that SARS needs to follow and that taxpayers need to comply with are dealt with under the Tax Administration Act. These provisions are simply an effective method that SARS uses to ensure that all vendors contribute honestly, fairly and regularly. Any taxpayer can be selected for a verification (request for relevant material) or an audit for the purpose of proper administration of tax. Taxpayers can be selected for verification, inspection or an audit on either a risk basis or at random.
When a VAT return is submitted to SARS, that return is assessed against certain risk factors on the computerised SARS system. If certain parameters are exceeded, a review or verification letter is automatically issued to the Vendor. SARS can issue a review letter for each VAT period so it’s important to check your E Filing profile for any review notification you might have received.
What to expect with a VAT verification or audit
When SARS conducts a verification of a Vendor’s VAT return, they will issue a unique bar-coded letter electronically via E-Filing. Any refund will only be paid out once the verification process has been completed.
The verification process often requires the taxpayer to submit the VAT input and VAT output detailed report, copies of the 5 largest supplier tax invoices and detail of any assets purchased including tax invoices. It is advisable to provide written reasons for large fluctuations in input VAT when submitting these documents. The supporting documentation can be uploaded via E Filing or hand delivered to your nearest SARS office within the time period specified by SARS.
If you are subject to a verification and the verification process has been completed, you could still be referred for audit as part of the SARS compliance process. In the event of an audit, you will receive a formal notification of audit. If no formal notice of an audit is received, you will receive a notice of assessment. A notice of assessment is where findings were made during the verification process resulting in SARS adjusting the values on the VAT return from disallowing certain input VAT amounts.
10 Common mistakes that business owners make in relation to VAT:
Hiring of Employees that Lack Knowledge of VAT Law:
By using or employing inexperienced staff to prepare and submit the company’s VAT returns results in the inaccurate recording of VAT bookkeeping entries and the VAT returns being incorrectly completed raising the high risk of a SARS audit after the enterprise’s income tax returns are submitted.
The person responsible for the bookkeeping should have sufficient knowledge of the VAT laws to ensure that VAT is applied correctly to all transactions or the business owner should outsource an accountant a day a month to check and correct incorrect VAT entries and to complete the VAT return. Some common examples of mistakes that inexperienced bookkeepers make is claiming input VAT on car hire or not taking the exempt fuel levy into account when processing airplane ticket invoices or payments.
Non-disclosure of All Sales:
A mistake many VAT vendors make is that they believe that because a sale transaction is zero rated, they don’t need to disclose zero rated sales on their VAT 201 return. This stance could not be more incorrect. Zero rates sales must be disclosed separately on the VAT 201 return under number 2 if the sale is a local zero rated services supply, or under number 2A if the sale relates to goods exported. By not disclosing zero rated sales on the VAT return results in discrepancies between the turnover on the annual financial statements of the entity and the VAT returns that will instantly trigger a costly VAT audit by SARS
Incorrect Disclosure or Failure to Disclose Input VAT on Capital Goods
Another mistake is the failure to disclose input on capital goods correctly on the return or including it under number 15, “other goods and/or services suppled to you (no capital)”. The VAT input on capital goods purchased during the VAT period needs to be reflected separately under number 14 on the return, “capital goods and/or services supplied to you”.
Capital goods and or services are amounts relating to the acquisition of an asset that is required to be capitalised to fixed assets or property, plant and machinery in terms of generally accepted accounting principles. Assets are purchased and utilised to generate income for the business over a period of some years and has a residual value at the end of each financial year. Therefore, assets are not regarded as an expense of the business and therefore the VAT input cannot be disclosed under ordinary standard goods and services. For example, the acquisition of new computers are capital goods and the installation of the computers are capital services directly related to the acquisition of the computers
Output VAT Payable on Insurance claims Received and the Sale of Asset
Any insurance claim received by you, whether it be for an asset or stolen cash, is deemed to be a supply by that insurance company to the enterprise (you) and the money received is deemed to be inclusive of VAT. For example, a motor vehicle insurance claim that was involved in an accident that has been refunded to the enterprise by the insurance company is deemed to be a supply to you, the enterprise inclusive of 15% VAT. Therefore, the mistake that many VAT vendors make is that they are not declaring the output VAT on insurance claims received and paying it over to SARS.
In addition, the selling price of an asset, other than an asset where an input VAT claim is denied, for example certain motor vehicles, is deemed to include VAT. The mistake that many VAT vendors make is that they do not disclose and pay over the VAT output on the sale of the asset.
VAT output on the receipt of an insurance claim and the sale of an asset should be reflected under 1A of the VAT 201 return.
Reconciliation of Accounting Records to the VAT returns before Submission
VAT vendors preparing their own books of account and VAT returns fail to reconcile the accounting records, the ledger, to the actual VAT returns submitted. For example, the turnover declared on the VAT returns do not agree to the turnover as per the general ledger, input VAT claimed does not tie up to cost of sales and expenses where VAT input claims are permissible and the total VAT amount due or refundable per the VAT 201 return does not agree to the VAT control account in the general ledger.
The difficulty for these VAT vendors arise when the financial statements, drawn up from the general ledger, are submitted together with the entity’s income tax return. SARS’s computer system identifies the discrepancy between the income tax return and the VAT returns and flags it. The consequence is that SARS will require the vendor to complete an IT14SD to explain the reconciling differences, or they will issue a letter to request an explanation of the differences. If there are no valid reasons for the differences that will satisfy SARS, they will immediately launch a full-blown audit that could have serious financial consequences for the vendor.
VAT Output Clawback on Private Use of Motor Vehicles Not Paid to SARS
A VAT output “clawback” on motor and related expenses is payable to SARS on all motor vehicles owned by the VAT vendor, even if the motor vehicle is financed, and is based on a formula. In fact, this is one of the first aspects of the VAT compliance requirements that SARS will audit.
The VAT output “clawback” on motor vehicles formula that is calculated monthly and disclosed under number 12 on the VAT 201 return is as follows:
A motor vehicle where input VAT on the purchase is denied:
The “determined value” of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.3% x 15 divided by 115
A motor vehicle where input VAT on the purchase is allowed:
The “determined value” of the vehicle (cost excluding VAT and finance charges) which is deemed to include the VAT clawback multiplied by 0.6% x 15 divided by 115
The VAT output payable is in essence a “clawback” of input VAT claimed on certain motor expenses that relate to the private portion of travel, for example, insurance, vehicle services, licences, etc.
Neglecting to Register for VAT when the Turnover Threshold is Met
Not registering for VAT when the VAT threshold has been reached. Maintaining accurate accounting records and receiving monthly management accounts is critical for the business owner to be able to determine in which month the business is likely to exceed the R1million threshold. Failure to register can result in VAT being applied to all sales from the deemed date of registration and a business that is not registered for VAT will not have valid tax invoices on which they could have claimed the input VAT resulting in the business paying out more VAT than if they had been registered as a VAT vendor at the correct date.
Failure to Obtain and or Retain Tax Invoices
A VAT registered enterprise may not claim input VAT where that enterprise is not in possession of a valid Tax Invoice. A supplier has 21 days to supply a valid Tax Invoice in terms of the VAT Act. Failure to obtain or retain valid TAX invoices will result in the VAT input being disallowed in a SARS verification or audit procedure with penalties and interest levied on the disallowed input VAT claim amount.
To ensure that your suppliers issue you with a valid Tax Invoice, the following information must appear on all Tax Invoices that exceed R5000.00 in order for the invoice to be considered valid for a VAT input deduction:
- The words “Tax Invoice” or “VAT invoice” must appear predominantly on the document
- Name, address of the supplier
- VAT number of the supplier
- Serialised tax invoice number and date of the invoice
- Name, address and VAT registration number of the recipient
- Quantity of goods or services supplied
- Proper description of the goods or services supplied
Total selling price charged including VAT. The VAT amount must either be separately quoted or the tax invoice must contain a statement that the total consideration includes VAT @ 15%.
Failure to Respond to VAT Verification Requests from SARS
Failure to respond to VAT reviews within the required time may result in SARS disallowing the input VAT and leaving the taxpayer having to object to this additional assessment.
Incorrect Bookkeeping or Failure to Disclose Penalties and Interest
Another common mistake is for VAT vendors to incorrectly or not account for penalties and interest in the books of account and not include these amounts in their next VAT return.
Once the verification has been finalized by SARS, you can expect one of the following:
- Where no risks were identified and no findings (errors) were made, a notification of the finalisation of the verification via E-Filing, email or post
- Where no risks were identified but a finding was made, a notice of assessment is issued informing the taxpayer of the adjustment made to the return
- Where further risks were identified, a Referral for Audit letter is issued. If you have a refund due, the refund will only be paid out once the audit has been completed with specific refund validations being passed.
An audit is only deemed to commence once a formal notification of audit by a specific auditor is issued to the VAT vendor. The vendor may be required to provide further supporting documentation or arrangements will be made for a site visit. The relevant material will differ depending on the scope of the audit.
The Notification of the audit will indicate the initial scope of the audit. The SARS auditor will provide an Authorisation Letter where the site audit is to be conducted and SARS will report on the progress of the audit every 90 days from the date of notification.
Our independent accountants at Business Accounting Network will ensure that your accounting records are compliant with the various legislation and generally accepted accounting principles and assist your bookkeeper in these matters so that any VAT verification or audit sprung on you by SARS can be professionally dealt with, giving you peace of mind.
Lindi Jonker, of Business Accounting Network is the franchise owner of the area practice at N1 City, Cape Town.
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