VAT (Chapter 13) [P2]

Question 1

Compulsory registration as a VAT vendor

Answer 1

Any business whose annual income exceeds R1 million

Question 2

Voluntary registration as a VAT vendor

Answer 2

Any business whose annual income is less than R1 million

Question 3

VAT rate

Answer 3

15%

Question 4

Standard rate of VAT

Answer 4

Normal rate at which VAT is charged

Question 5

What is excise duty / sin tax

Answer 5

Levied on items such as tobacco, liquor, etc.

Question 6

What is transfer duty

Answer 6

When buying property, this is paid to transfer the property to the new owner’s name

Question 7

What is estate duty

Answer 7

Tax is levied on all property of the deceased (their estate)

Question 8

What is UIF

Answer 8

Short-term relief to workers when unemployed that they contribute to fund while employed

Question 9

What is the skills development levy

Answer 9

Used for education and training, and is the responsibility of the employer

Question 10

What is PAYE

Answer 10

Deducted from the salaries and wages of all of the employees of a business and paid to South African Revenue Services (SARS)

Question 11

What is capital gains tax

Answer 11

Taxed on income received from sale of fixed assets

Question 12

What is donations tax

Answer 12

Payable on the value of property disposed of by a resident by means of donation

Question 13

What are zero-rated items

Answer 13

• 0% VAT (basic foodstuffs, paraffin)
• petrol, diesel (fuel levies)
• property rates
• export of movable goods
• international transport of goods or services

Question 14

What are exempt items

Answer 14

• not VAT charged
• financial services
• rental of private property
• transport in SA
• educational services supplied by state
• childcare services

Question 15

What is tax avoidance

Answer 15

• legally reducing taxable income
• legitimate means of paying less tax

Question 16

What is tax evasion

Answer 16

• Failure to pay / deliberate underpayment of taxes
• illegal

Question 17

What is value added tax

Answer 17

• indirect tax
• charged on goods and services
• 15% standard rate, minister of finance can change
• sales/services rendered = output
• purchases = input
• owed to SARS = output - input

Question 18

What is VAT not charged on?

Answer 18

• hobbies unless it becomes a business
• private sale of personal/domestic items
• salaries and wages (SITE and PAYE)
• exempt items

Question 19

How do you calculate the price, excluding VAT

Answer 19

Price (excl. VAT) = price (incl. VAT) × (115÷100)

Question 20

How to calculate price, including VAT

Answer 20

Price (incl. VAT) = price (excl. VAT) × (115 ÷ 100)

Question 21

How to calculate VAT

Answer 21

VAT = price (incl. VAT) × (15 ÷ 115)

VAT = price (incl. VAT) - price (excl. VAT)

Question 22

Legal requirements for VAT vendors

Answer 22

1. Ensure they collect VAT on all taxable transactions
2. Submit VAT returns within the required tax period
3. Make VAT payments on time and where required
4. Issue legitimate tax invoices

Question 23

What is the invoice basis

Answer 23

The standard method used to account for VAT, which requires vendors to account for VAT based on the tax period in which invoices are issued or received

Question 24

What is the payments basis

Answer 24

Accounting for VAT requires vendors to account for VAT only when payments are actually received and payments are actually made

Question 25

Advantages of the invoice basis

Answer 25

- VAT on credit purchases can be deducted before payment is made to creditors - it is relatively easy to calculate and administer

Question 26

Disadvantages of the invoice basis

Answer 26

- VAT on credit sales is included before payment is received from debtors - can lead to cash flow problems

Question 27

Advantages of payments basis

Answer 27

- VAT on credit sales is only included when payment is received from debtors - can assist cash flow

Question 28

Disadvantages of payment basis

Answer 28

- VAT on credit purchases can only be deducted after payment is made to creditors - can be more difficult to calculate and administer

Question 29

What is a tax invoice

Answer 29

A document that contains specific details as prescribed in the VAT act and is used to support the input tax claim, providing evidence of the transaction on which the tax claim is based. Vendors are required to retain them for at least 5 years

Question 30

When is a tax invoice not required

Answer 30

Transactions of R50 or less, however, there should be a valid source document indicating the amount of VAT charged

Question 31

What should a tax invoice contain

Answer 31

- "TAX INVOICE" in a prominent place - name, address, and VAT registration number of supplier and recipient - serialised invoice number - date of issue of tax invoice - full and accurate description of goods or services supplied - quantity or volume of goods or services supplied - price and VAT

Question 32

What does not need to be specified in an abridged tax invoice?

Answer 32

- name, address, VAT registration number of recipient - quantity of goods or services supplied

Question 33

When would a vendor make VAT adjustments

Answer 33

- bad debts - discount is allowed or received - goods are returned by customer or to supplier

Question 34

What is the net effect of bad debts on VAT

Answer 34

Decrease in amount of VAT payable

Question 35

What is the net effect of discount allowed on VAT

Answer 35

Decrease in amount of VAT payable

Question 36

What is the net effect of discount allowed on VAT

Answer 36

Increase in amount of VAT payable

Question 37

What is the net effect of debtors allowances on VAT

Answer 37

Decrease in amount of VAT payable

Question 38

What is the net effect of creditors allowances on VAT

Answer 38

Increase in amount of VAT payable

Question 39

Why is VAT the tax system most susceptible to fraud and abuse

Answer 39

It has a reliance on self-assessment by vendors and on its refund mechanism

Question 40

How do vendors commit VAT fraud

Answer 40

- collecting VAT from customers, but not paying all of it to SARS - claiming VAT refunds on fictitious invoices - charging VAT without being registered as a VAT vendor

Question 41

What is round tripping or carousel fraud

Answer 41

When a vendor falsely claims that goods have been exported but sells them locally. Exports are zero-rated, but the input tax on those goods can still be claimed, so the vendor claims the VAT refund for input tax but accounts for 0% output tax, thus not paying VAT collected to SARS

Question 42

Risks associated with VAT

Answer 42

- financial risk - reputational risk - cash flow risk - fraud risk

Question 43

Internal control of VAT

Answer 43

- only valid tax invoices should be issued - VAT payments to SARS should be processed punctually and paid in full - collection of debt should be carefully managed, so output VAT is received asap - VAT refunds claimed from SARS should be monitored and followed up if payment isn't received within 21 days - VAT 201 return forms should be completed accurately and submitted timeously - invoices from suppliers should be checked to determine that invoices meet all requirements of valid tax invoice

Question 44

Internal audit of VAT

Answer 44

- performing a risk-based assessment of VAT-related activities to identify areas of significant risk - planning detail and scope of work to be performed during fieldwork phase, giving priority to those areas of greatest risk - performing fieldwork to investigate measures taken to control risks associated with VAT and to assess whether these risks are being adequately managed and controlled - different personnel are responsible for administering the VAT accounting system, completing VAT returns, making VAT payments, reconciling VAT accounts - reporting to management on adequacy of risk management and internal control systems relating to VAT and providing recommendations for improvement - establishing follow-up process to monitor any corrective action taken by management