[FAQ] The VAT registration of a farming operation

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[FAQ] The VAT registration of a farming operation

• 25 January 2021
• Accounting & Financial Reporting
• Christo Theron

Background

A taxpayer wants to register a farming operation for VAT. Please advise on the following:

• Is the VAT registration a special class of registration which allows the sale of inputs at zero-rate?
• If they do not want to charge VAT to farmers, should the farmers have a special registration?

Answer

The VAT Act

Section 11(1)(g) of the VAT Act zero-rates a supply where “the supply is of such goods used or consumed for agricultural, pastoral or other farming purposes as are set forth in Part A of Schedule The proviso to the section determines that the goods may only be supplied at the zero-rate of VAT if the recipient and the supplier comply with the compliance requirements set out in part A of Schedule 2 to the VAT Act.

Item 3 Part A of Schedule 2 to the VAT Act lists the various categories of supplies of goods that may be made at the zero-rate of VAT, subject to the general compliance provisions.

Paragraph 2 of Part A of Schedule 2 to the VAT Act determines that the goods may only be supplied at the zero-rate of VAT if all the following requirements are met:

(a) The supplies must be made to a registered VAT vendor.

(b) The Commissioner for SARS must be satisfied that the above vendor, being the recipient of the goods, carries on agricultural, pastoral or other farming operations and the Commissioner must have issued to him a notice of registration in which authorisation is granted whereby the goods concerned may be supplied to him at the zero-rate of VAT.

(c) The goods must be supplied to a VAT vendor who is in possession of a valid notice of registration as a VAT vendor and an authorization discussed above. In practice the VAT registration certificate of a vendor would indicate whether it is registered as a valid recipient of zero-rated good as contemplated in section 11(1)(g) of the VAT Act.

(d) A tax invoice must be issued in respect of the relevant supply containing the details required for a full tax invoice, irrespective of the amount of the consideration.

(e) The disposal of the goods must not be prohibited in terms of any other legislation that may regulate the sale and distribution of such products.

Application of the principles

Sales of agricultural inputs

Subject to compliance with the above requirements, your client will be entitled to supply goods at the zero-rate of VAT in terms of section 11(1)(g) of the VAT Act, limited to the categories of goods listed in Part A of Schedule 2 to the VAT Act.

There are no special registration rules that apply to the suppliers of goods that may be supplied at the zero-rate of VAT in terms of section 11(1)(g) of the VAT Act.

Purchases of agricultural goods at the zero-rate of VAT

Should your client wish to purchase goods to be used in its own farming enterprise, it must indicate on its application for registration that it will be conducting farming operation (activity code). Its VAT registration will then be endorsed as a qualifying purchaser of zero-rated agricultural inputs.

Kindly note that the zero-rating will only apply to goods acquires for use in the agricultural operation (limited to the categories of goods listed in Part A of Schedule 2 to the VAT Act). The normal VAT rules will apply to all other purchases (for example goods purchased for resale).

Webinar Commentary

For further webinar commentary, view our Compliance Series - Vat 201 - What To Do And What Not To Do - 2020 (Session 3).

FAQs

1. When must a farming operation register for VAT in South Africa?

A farming operation must register for VAT if its taxable supplies exceed or are expected to exceed R1 million in any 12-month period.

2. Can a farmer voluntarily register for VAT?

Yes. A farmer may voluntarily register for VAT if taxable supplies exceed R50 000 in a 12-month period, provided the farming activity is carried on continuously.

3. What types of farming activities qualify for VAT registration?

Qualifying activities include crop production, livestock farming, dairy farming, poultry farming, and other agricultural activities conducted to make taxable supplies.

4. Are all farming supplies subject to VAT?

Most farming supplies are taxable at the standard rate, while certain goods, such as basic foodstuffs, may be zero-rated if specific requirements are met.

5. Can a VAT-registered farmer claim input VAT on farming expenses?

Yes. A VAT-registered farmer may claim input VAT on goods and services acquired for making taxable farming supplies, subject to normal VAT rules.

6. Can a farming operation register for VAT if it is making losses?

Yes. A farming operation can register even if it is not yet profitable, provided there is a genuine intention to carry on farming activities as an enterprise.

7. What happens if a farmer fails to register for VAT on time?

Late VAT registration may result in penalties, interest, and backdated VAT liabilities imposed by SARS.

8. Can different farming activities be registered under one VAT number?

Yes. If multiple farming activities are conducted by the same legal entity, they may generally be registered under a single VAT number.

9. How does VAT registration affect the sale of farming produce?

Once registered, the farmer must charge VAT on taxable sales and issue valid tax invoices where required.

10. Why is VAT registration important for farming operations?

VAT registration allows farmers to recover input VAT on expenses, improve cash flow, and remain compliant with SARS requirements.

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