Taxpayers may register for Value-Added Tax (‘VAT’) on either a voluntary or compulsory basis. This article considers the commercial benefits linked to an enterprise registering for VAT on a voluntary basis only.
Taxpayers who are registered for VAT are required to charge VAT on supplies (that is on sale of goods or the rendering of services) made by them in the furtherance of their respective enterprises. These taxpayers are also generally entitled to claim VAT inputs to be refunded to them on expenses incurred by it in conducting its enterprise.
It is potentially beneficial therefore for a business to be VAT registered. Consider the following example:
Company X conducts business as a consulting practice and is not registered for VAT. During the month of June it issues invoices to clients amounting to R100,000, while it also incurs expenditure towards service providers of R22,800 (which includes a VAT amount levied by the VAT registered suppliers). X’s net income for June thus amounts to R77,200.
If X were to be registered for VAT, it would have been able to claim the input VAT levied by its suppliers of R2,800 from SARS on the expenditure incurred above, whilst its income would still have been R100,000, since the invoices to be made out will have been for R114,000 (which includes VAT of R14,000). X’s customers may be unaffected and happy to pay the increased invoice amount, since they too may be registered VAT vendors and therefore able to claim input VAT amounts of R14,000 on the amounts paid to X. However, this position would change significantly if X’s customers are not registered VAT vendors themselves. By virtue of X becoming VAT registered, fees levied would for these customers be raised by effectively 14%, which may frighten off many of X’s customers.
While therefore it will always be beneficial to register for VAT to be entitled to claim input VAT amounts on expenses incurred, businesses should consider to what extent this will affect their customer base. As stated above, if a business’ customer base consists mostly of VAT vendors, then becoming VAT registered and levying VAT on invoices will have little bearing on customers, to whom the levying of VAT will at most have a cash flow implication, but no increased net fees. The business itself will then benefit, as it will be able to claim input VAT amounts.
However, juxtaposed hereto is the position of those businesses the clients of which mostly consist of non-VAT registered taxpayers. In these instances, by virtue of being VAT registered, the company may have priced itself out of the market, not necessarily by virtue of its fees, but through it levying VAT which non-VAT customers are unable to claim as inputs. Typical business that should therefore think twice before registering for VAT are typical businesses that provide services to natural persons in personal capacity, such as doctors for example.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)