Complete your VAT returns properly to ensure overall compliance
Grant Thornton’s Tax advisers often get asked why clients are required to include transactions in their VAT returns where no VAT was charged. Clients lament that there is no loss to the South African Revenue Service (SARS) so there should be no issue.
But, this is one of the biggest misunderstandings currently and it has a significant impact on the taxpayers’ overall tax compliance.
SARS has long ago moved away from focusing on just one tax type during audits and, for the last few years, SARS has considered all information relating to all different taxes they have access to. SARS has performed integrated tax audits for several years now where they compare information submitted for the various taxes and analyse the implications that these sources of information have on other relevant taxes.
One of the methods that SARS has implemented to obtain the relevant information from taxpayers is through the IT14 SD This supplementary declaration over and above the normal ITR14 requires a taxpayer to reconcile the information submitted in the various tax returns i.e. ITR14 corporate income tax return, VAT return, PAYE return and, if applicable, the Customs declarations.
Why is the VAT return important?
Over the past few years, SARS has refined the various fields on the VAT return in order to obtain information on specific supplies relating to a taxpayer’s business. Examples of these are the differentiation between capital and normal goods and the distinction between locally supplied goods and imported and exported goods. In addition, SARS also requires taxpayers to separately declare zero-rated exports and other zero-rated supplies, as well as exempt and non-supplies. In addition, SARS has created specific fields for supplies relating to accommodation, adjustments and imported services. With regards to input taxes, SARS has also included specific fields focused on adjustments in particular, such as change in use adjustments, bad debts and other adjustments.
In our view, SARS did not just want to make taxpayers lives difficult by increasing the administrative burden and isolate the various supplies and transaction but rather to assist in identifying risks such as apportionment of input taxes and the under-declaration of output tax as well as the inflation of input taxes.
In addition, these amounts submitted on the VAT returns have specific bearing to amounts declared via other tax returns. Simple examples would be that all the amounts declared under the supply of goods and services should, in principle, reconcile to the revenue in the Annual Financial Statement (AFS). The zero rated export transaction should agree to the export declarations made for Customs purposes. Further, any incorrect export declaration may at times trigger audits for transfer pricing purposes especially where there are related party transactions. Any transfer pricing related inconsistencies may impact the transaction value as the primary basis for customs valuation. This may then affect the input tax claims on the importation of goods into South Africa. Supplies of capital goods should align to the disposals of assets in the fixed asset register.
Similar to the fields included under the calculation of input tax, the value of imported goods (capital and normal) should agree to the declarations of imports for Customs purposes while the capital input tax claimed should agree with the acquisitions of assets in the fixed asset register. The biggest issue is that the normal input tax deductions have to be reconciled to the Cost of Sales in the AFS, as is required in terms of the IT14 SD. This is often a difficult calculation since a significant portion of input tax is included in general expenses in the Income Statement. However, the reconciliation should be manageable should the taxpayer keep proper records, especially if the accounting system has been set up in such a way that it can easily identify the various supplies and transactions.
Why should you comply?
Not all transactions that are not properly declared on the VAT return would result in SARS levying assessments with penalties and interest. Examples include when capital input tax gets claimed under normal input tax; or zero-rated and exempt/non supplies are not being declared on the VAT return. However, the non-compliance will generally result in unnecessary queries from SARS and may result in unwanted and unwarranted assessments with penalties and interest. This is something which we at Grant Thornton have experienced recently where tax payers have, according to SARS, not discharged the burden of proof, Taxpayers are then required to object to these assessments and they have to revisit returns submitted some years ago. Sometimes these returns were submitted by individuals who are not around anymore to assist with the process.
The bottom line is then: to avoid the cumbersome interaction and communication with SARS, regularise your tax matters by completing your VAT returns correctly and fully.
For further information or for assistance in understanding the matters pertaining to completing VAT returns, please contact us.