VAT Compliance | 10 Common Mistakes to Avoid

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Not meeting tax return requirements, compliance matters and deadlines could lead to your company being audited and investigated by SARS. All processes relating to these investigations, be it a tax verification, audit or criminal investigation, are handled under South Africa’s Tax Administration Act. The aim of this act, and the related processes, is to ensure that all business owners in South Africa contribute honestly, fairly and regularly.

Any business can be selected for a verification, inspection, or audit at random, and you as business owner would need to supply SARS with the required documents before the stipulated deadline, or risk facing certain penalties.

To ensure that your business stays compliant, here are 10 common mistakes to avoid when it comes to your company and VAT requirements:

  1. Do not rely on inexperienced staff

When it comes to your business’ VAT returns, you should never rely on inexperienced employees to prepare or submit the returns. Making use of inexperienced employees can lead to inaccurate bookkeeping and the incorrect completion of your VAT return, which puts your company at risk of a SARS audit.

  1. All sales need to be disclosed

When completing tax returns, many business owners make the mistake of not disclosing zero rated sales. According to tax regulations, zero rated sales need to be disclosed on the VAT 201 return under number 2 if the sale took place locally, or under number 2A if the sale relates to exported goods.

  1. Failure to disclose VAT on capital goods, or doing it incorrectly

Capital goods and or services refer to the purchase of an asset that is to be capitalised to fixed assets or property, plant and machinery in generally accepted accounting principles. A common mistake is the failure to disclose input on capital goods, or disclosing it as “other goods and/or services.”

  1. Not declaring output VAT on insurance claims

VAT output on receiving an insurance claim, along with the sale of the asset should be reflected under 1A of the VAT 201 return. Any insurance claim received by your company is considered a supply from the insurance company to the enterprise, which means that the money received is deemed to be inclusive of VAT.

  1. Reconciliation of accounting records to the VAT returns

Many businesses preparing their own accounts and VAT returns fail to reconcile their accounting records to the actual VAT return that they submit, and SARS will immediately identify this discrepancy and flag it.

  1. VAT output clawback on private motor vehicles

A tax output “clawback” on vehicles and related expenses is payable to SARS, and the cost is based on a formula. This is often one of the first VAT compliance issues that SARS will audit, which is why it is important that it is done correctly.

  1. Not registering for VAT when the turnover threshold is met

If your business reaches the national tax threshold, you are required to register for VAT. Failure to register could lead to tax being applied to all sales from the estimated day of registration.  Entities trading in South Africa are required to register for VAT as soon as the total value of taxable goods or services exceeds R1m in a 12-month period, or is expected to exceed this month.

  1. Failure to obtain or retain tax invoices

Failure to obtain or retain binding tax invoices will result in the VAT input being rejected by SARS and penalties on the disallowed VAT claim amount will follow. This can be prevented by ensuring that all your suppliers issue you with valid tax invoices that contain the required information.

  1. Not responding to VAT verification requests from SARS

If your business fails to respond to a VAT verification request within the stipulated timeframe, you may be subjected to additional assessment.

  1. Faulty bookkeeping and failure to disclose penalties

Tax vendors often make the mistake of not accounting for, or incorrectly accounting for penalties and interest in their business’ accounts – which means that these amounts are then incorrect in their tax returns.