When a new company registers for VAT can the company claim input tax on capital and standard rated purchases made prior to the effective date of registration? How does the 5-year input tax prescription rule apply to the situation?
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 in terms of section 16(3)(f) of the VAT Act 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.
Interpretation Note 92 of the VAT Act determines that the following documents must be obtained and retained when a deduction is made in terms of section 16(3)(f) of the VAT Act.
Proviso (i)(ee) to section 16(3) of the VAT Act determines that where a VAT vendor is entitled to deduct any amount in a particular tax period, the vendor may deduct that amount from the amount of output tax attributable to a later tax period which ends no later than 5 years after the end of the tax period during which the vendor for the first time became entitled to the deduction.
Further webinar commentary on VAT record keeping requirements can be accessed here.