[FAQ] Delayed VAT registration and understatement penalties

[FAQ] Delayed VAT registration and understatement penalties

• 19 November 2020
• VAT
• Christo Theron

Background

A client installs solar panels. For the year ended 28 February 2018 the client recorded fee income of just over R 1 million. For the financial years ended 28 February 2019 and 29 February 2020 the client recorded fees of R 2.7 million and R6.6 million respectively. For the 2021 year I am confident that fees will exceed R1 million. The client has never registered for VAT.

• Will the client, not having registered for VAT, trigger understatement penalties (necessitating application under the VDP)?

• Can the client claim input VAT in respect of expenses/capital items purchased from the date that it’s deemed to be a vendor (March 2018) to date?

Answer

The Tax Administration Act (“the TAA”)

• Section 222(1) of the TAA determines that in the case of an understatement by a taxpayer, the taxpayer must pay the understatement penalty, unless the understatement resulted from a bona fide inadvertent error.

• The definition of “understatement “ in section 221 of the TAA was amended in 2018 to include prejudice to SARS or the fiscus as a result of failure to submit a return required under a tax Act or by the Commissioner.

• Section 222(4)(b) of the TAA determines that where an understatement penalty is imposed as a result of the failure to submit a return, the tax declared on the return is deemed to be nil.

The VAT Act

Sections dealing with registration and submission of VAT returns

• Section 28(1) of the VAT Act determines that every vendor must furnish the Commissioner with a return reflecting such information as may be required for the purpose of the calculation of VAT … and calculate the amount of VAT … and pay any amount payable to SARS or calculate the amount refundable by SARS.

• “Vendor” is defined in section 1(1) of the VAT Act as any person who is or should be registered in terms of the VAT Act.

• 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(4)(b) of the VAT Act determines that where any person has not applied for registration as a VAT vendor and the Commissioner is satisfied that the person is liable to be registered in terms of the VAT Act, the person is deemed to be a vendor for VAT purposes with effect from the date on which that person first became liable to be registered in terms of the VAT Act.

Sections dealing with input tax

• Section 16(3)(a)(iii) of the VAT Act determines that a VAT vendor may deduct/claim input tax in respect of goods or services made to the vendor during a tax period.

• Section 16(3)(f) of the VAT Act allows a vendor a deduction of amounts calculated in accordance with, amongst others, section 8(4) of the VAT Act.

• Section 18(4)(b)(i) of the VAT Act determines that where goods or services have been supplied to or imported by a person on or after 30 September 1991, VAT has been charged on the supply, and no deduction of input tax has been made, such goods are deemed to be supplied to the vendor in the tax period that the vendor first uses the goods or services in a taxable activity.

• The formula to compute the quantum of the deduction is: A x B x C x D, where “A” represents the tax fraction (currently 15/115), "B" represents the lesser of the adjusted cost of the goods or the open market value of the goods or services at the time when the supply is deemed to be made, “C” represents the percentage taxable use to which the goods or services will be put, and “D” represents the extent to which the purchase price of second-hand goods have been settled.

Application of the principles

Imposition of understatement penalties

• Based on the current wording of the TAA, SARS must impose an understatement penalty in the case of a person that should have but have not registered as a VAT vendor, unless the person can prove that the non-compliance resulted from a bona fide inadvertent error.

• Whether SARS would impose an understatement penalty in the case of a person registering before being “caught out” by SARS, depends on the facts of each case.

Input tax

• Input tax on goods or services supplied to the client during the period that the client should have been registered as a VAT vendor, may be claimed as normal input tax deductions. It is irrelevant that the VAT registration number of the client is not reflected on tax invoices issued prior the date that the client was actually registered by SARS (i.e. the date that the VAT registration number was issued).

• With regards to goods and services acquired before the client became a VAT vendor (i.e. pre-March 2018), an adjustment may be claimed in respect of all goods and services held by the client on the effective date of registration (i.e. March 2018) to the extent that such goods or services will be used in the VAT registered enterprise (section 16(3)(f) read with section 18(4) of the VAT Act). This would include, amongst others, trading stock, capital goods, etc held on 28 February 2018.

Webinar Commentary

Further webinar commentary on 2020 Practical Q&A with Prof Jackie Arendse - Managing SARS penalties (session 3) can be accessed here.

0 COMMENTS

LEAVE A COMMENT