A sole proprietor performs services for clients abroad. More than 90% of the taxpayer’s revenue is derived from abroad. The taxpayer is currently registered as a VAT vendor and as such is always in a refund position.
Should the taxpayer deregister for VAT?
The VAT Act
Sections dealing with registration as a VAT vendor
Section 23(1)(a) of the VAT Act determines that every person who carries on a VAT enterprise and is not registered as a VAT vendor becomes liable to be registered at the end of any month where the total value of taxable supplies made by that person in the period of 12 months ending at the end of that month in the course of carrying on all enterprises has exceeded R1 million.
Section 23(3)(b)(i) of the VAT Act determines that where a person is carrying on a VAT enterprise and the total value of taxable supplies made by that person in the course of carrying on all VAT enterprises in the preceding period of 12 months has exceeded R50 000, that person may apply for voluntary registration as a VAT vendor.
“Taxable supply” is defined in section 1(1) of the VAT Act as a supply of goods or services that is chargeable with VAT in terms of section 7(1)(a) of the VAT Act and specifically includes zero-rated supplies.
Section 7(1)(a) of the VAT Act imposes VAT on the supply of goods or services made by a vendor in the course or furtherance of the VAT enterprise carried on by the vendor.
Sections dealing with deregistration as a VAT vendor
Section 24(1) of the VAT Act determines that a vendor ceases to be liable to be registered as a VAT vendor where the Commissioner for SARS is satisfied that the total value of the vendor’s taxable supplies in the period of 12 months commencing at the beginning of any tax period of the vendor will not be more than R1 million.
Section 24(2) of the VAT Act determines that every vendor who wishes to have his registration cancelled in the circumstances contemplated in section 24(1) of the VAT Act (i.e. where the value of its future annual taxable supplies will be < R1 million), may request the Commissioner for SARS in writing to cancel his registration.
Application of the principles
Zero-rated supplies are taxable supplies for VAT purposes. A VAT vendor that only makes zero-rated supplies will always be in a net-refund position as the vendor will be entitled to input tax credits in respect of the acquisition of local goods and services for its VAT enterprise. This is a benefit if making zero-rated taxable supplies and should be utilised where available.
It is common cause that the person is currently registered as a VAT vendor. If the vendor’s value of all taxable supplies (i.e. standard and zero-rated goods and services) exceeds R1 million per annum, the vendor may not apply for deregistration as the person would be liable to be registered as a VAT vendor in terms of section 23(1)(a) of the VAT Act.
If the person’s anticipated value of all taxable supplies (i.e. standard and zero-rated goods and services) will not exceed R1 million in the next 12-month period, the vendor may apply for deregistration as the vendor would no longer be liable to be registered as a VAT vendor in terms of section 23(1)(a) of the VAT Act.
Should the person elect to deregister as a VAT vendor, all VAT charged to the vendor by suppliers of goods or services after deregistration would become non-recoverable VAT that will increase the cost of doing business.
Generally speaking a VAT vendor making exclusively or primarily zero-rated supplies should stay registered as a VAT vendor to utilise the benefits of input tax credits without a corresponding output tax liability.
If the refunds from SARS are insignificant in relation to the administrative burden of managing the VAT (and the annual value of taxable supplies made by the VAT vendor < R1 million) consideration could be given to deregister as a VAT vendor based on the cost-benefit business principle.
Further webinar commentary on the deregistration as a vat vendor can also be accessed here.