VAT (Chapter 13) [P2] Flashcards
Compulsory registration as a VAT vendor
Any business whose annual income exceeds R1 million
Voluntary registration as a VAT vendor
Any business whose annual income is less than R1 million
VAT rate
15%
Standard rate of VAT
Normal rate at which VAT is charged
What is excise duty / sin tax
Levied on items such as tobacco, liquor, etc.
What is transfer duty
When buying property, this is paid to transfer the property to the new owner’s name
What is estate duty
Tax is levied on all property of the deceased (their estate)
What is UIF
Short-term relief to workers when unemployed that they contribute to fund while employed
What is the skills development levy
Used for education and training, and is the responsibility of the employer
What is PAYE
Deducted from the salaries and wages of all of the employees of a business and paid to South African Revenue Services (SARS)
What is capital gains tax
Taxed on income received from sale of fixed assets
What is donations tax
Payable on the value of property disposed of by a resident by means of donation
What are zero-rated items
- 0% VAT (basic foodstuffs, paraffin)
- petrol, diesel (fuel levies)
- property rates
- export of movable goods
- international transport of goods or services
What are exempt items
- not VAT charged
- financial services
- rental of private property
- transport in SA
- educational services supplied by state
- childcare services
What is tax avoidance
- legally reducing taxable income
- legitimate means of paying less tax
What is tax evasion
- Failure to pay / deliberate underpayment of taxes
- illegal
What is value added tax
- 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
What is VAT not charged on?
- hobbies unless it becomes a business
- private sale of personal/domestic items
- salaries and wages (SITE and PAYE)
- exempt items
How do you calculate the price, excluding VAT
Price (excl. VAT) = price (incl. VAT) × (115÷100)
How to calculate price, including VAT
Price (incl. VAT) = price (excl. VAT) × (115 ÷ 100)
How to calculate VAT
VAT = price (incl. VAT) × (15 ÷ 115)
VAT = price (incl. VAT) - price (excl. VAT)
Legal requirements for VAT vendors
- Ensure they collect VAT on all taxable transactions
- Submit VAT returns within the required tax period
- Make VAT payments on time and where required
- Issue legitimate tax invoices
What is the invoice basis
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
What is the payments basis
Accounting for VAT requires vendors to account for VAT only when payments are actually received and payments are actually made
Advantages of the invoice basis
- VAT on credit purchases can be deducted before payment is made to creditors
- it is relatively easy to calculate and administer
Disadvantages of the invoice basis
- VAT on credit sales is included before payment is received from debtors
- can lead to cash flow problems
Advantages of payments basis
- VAT on credit sales is only included when payment is received from debtors
- can assist cash flow
Disadvantages of payment basis
- VAT on credit purchases can only be deducted after payment is made to creditors
- can be more difficult to calculate and administer
What is a tax invoice
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
When is a tax invoice not required
Transactions of R50 or less, however, there should be a valid source document indicating the amount of VAT charged
What should a tax invoice contain
- “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
What does not need to be specified in an abridged tax invoice?
- name, address, VAT registration number of recipient
- quantity of goods or services supplied
When would a vendor make VAT adjustments
- bad debts
- discount is allowed or received
- goods are returned by customer or to supplier
What is the net effect of bad debts on VAT
Decrease in amount of VAT payable
What is the net effect of discount allowed on VAT
Decrease in amount of VAT payable
What is the net effect of discount allowed on VAT
Increase in amount of VAT payable
What is the net effect of debtors allowances on VAT
Decrease in amount of VAT payable
What is the net effect of creditors allowances on VAT
Increase in amount of VAT payable
Why is VAT the tax system most susceptible to fraud and abuse
It has a reliance on self-assessment by vendors and on its refund mechanism
How do vendors commit VAT fraud
- 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
What is round tripping or carousel fraud
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
Risks associated with VAT
- financial risk
- reputational risk
- cash flow risk
- fraud risk
Internal control of VAT
- 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
Internal audit of VAT
- 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
