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[FAQ] Input tax prior the effective date of registration

Background

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?

Answer

The VAT Act

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.

Documentary requirements

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.

  • Goods or services acquired on a date falling within a period of 5 years immediately preceding the date of the adjustment:
    • The tax invoice issued and proof of the open market value of the goods (the fact that the original tax invoice does not contain the recipient’s VAT registration number is irrelevant as it was not a requirement for a valid tax invoice prior to registration as a VAT vendor).

The 5-year prescription rule

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.

Application of the principles

  • VAT on goods or services acquired prior to the date of registration as a VAT vendor may be claimed when the person registers as a VAT vendor in terms of section 16(3)(f) read with section 18(4) of the VAT Act.
  • The deduction is limited to the extent that such goods or services will be used in the VAT registered business, for example capital goods held on the date of registration, trading stock on hand on the date of registration, rent paid before the date of registration to the extent that the rent relates to the period after registration as a VAT vendor, etc.
  • The deduction must be made within 5 years from the effective date of registration as a VAT vendor. The fact that the goods or services have been acquired more than 5 years before the effective date of registration is irrelevant.
  • The deductions are always subject to the appropriate documentation being held by the VAT vendor making the deduction.

Webinar Commentary

Further webinar commentary on VAT record keeping requirements can be accessed here.

 

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