Understanding the difference between VAT (Value Added Tax) and Tax is crucial for business owners and individuals alike. Lusanda Mncwaba from The Accounting Village shared her expert knowledge on this topic, offering practical advice for navigating these financial obligations.
Difference Between VAT and Tax in South Africa
What is VAT?
VAT, or Value Added Tax, is an indirect tax levied at 15% on most goods and services in South Africa. Businesses act as agents for SARS (South African Revenue Service), collecting VAT on behalf of the government.
“VAT is an additional tax charged on your goods and services. As a VAT-registered business, you are required to add 15% on your goods or services and pay this over to SARS.”
Example:
If a product costs R1,000, the VAT will be R150. The business collects this R150 for SARS and keeps the R1,000 as revenue.
What is Tax?
Tax, on the other hand, refers to various types of government levies, including Income Tax, Corporate Tax, and Capital Gains Tax. While VAT is charged on goods and services, tax is calculated on profits or income.
“Income tax applies to businesses and individuals on their earnings. Unlike VAT, which is collected on every sale, tax is calculated after assessing the net income or profit of the entity or person.”
Key Differences Between VAT and Tax
| Aspect | VAT | Tax |
|---|---|---|
| Type | Indirect tax | Direct tax |
| Charged On | Goods and services | Income or profits |
| Rate | Fixed at 15% | Varies by income bracket or business type |
| Who Pays? | Consumers | Businesses/individuals |
| Collected By | Businesses (on behalf of SARS) | SARS |
Benefits of VAT Registration
- Input VAT Claims:
Registered businesses can claim back VAT paid on purchases from suppliers. - Competitive Edge:
Many large companies prefer working with VAT-registered vendors.
“If your supplier charges you VAT and you’re registered, you can claim it back to offset your VAT liability. This is particularly beneficial for businesses with high expenditure on goods.”
When Must You Register for VAT?
There are two scenarios for VAT registration:
- Compulsory Registration:
- If your business turnover exceeds R1 million annually, you must register.
- Tip from Lusanda:“Monitor your monthly revenue. If it hits R85,000 or more, you’re likely to exceed R1 million for the year and must register.”
- Voluntary Registration:
- Businesses below the R1 million threshold can register if they anticipate high capital expenditure or need VAT registration for specific contracts.
- Example: Start-ups investing in equipment can benefit from input VAT claims.
What Happens If You Don’t Register for VAT When Required?
Failing to register on time has serious consequences:
- SARS will estimate the VAT due from the date you were obligated to register.
- Penalties and interest will be added.
- You could face a significant financial burden.
“SARS will issue a hefty bill, including penalties and interest, if they discover you failed to register when required. Always comply early to avoid complications.”
Managing VAT Effectively
Lusanda offers key advice for managing VAT:
- Separate VAT Funds:
- Open a dedicated savings account to store collected VAT until payment is due.
- “This ensures the funds are not mistakenly used for business expenses.”
- Compliant Invoicing:
- Ensure invoices meet SARS standards, or VAT claims may be rejected.
- Professional Assistance:
- Engage an accountant to manage VAT complexities, especially for claims involving vehicles or capital equipment.
- “Mistakes, like incorrectly claiming VAT on a vehicle, can result in penalties. Always consult professionals.”
Can You Claim VAT Refunds?
Yes, but only in specific cases, such as:
- Seasonal Businesses:
- During off-peak periods when expenses exceed revenue.
- Zero-Rated Supplies:
- Businesses dealing in zero-rated goods (e.g., exports) can consistently claim input VAT.
“VAT refunds are heavily audited. Ensure your documentation is in order, or SARS may reverse your claims and charge penalties.”
Conclusion
The difference between VAT and tax lies in their application: VAT applies to transactions, while tax is calculated on income or profits. Managing VAT effectively is crucial for business success, and Lusanda’s insights highlight the importance of compliance and professional assistance.
For further assistance, visit The Accounting Village or consult a registered professional to manage your VAT and tax obligations seamlessly.