Cash is king

Written by Lesedi Seforo, Tax Technical Advisor, SAIT • Online since 15.09.2015 • Filed under Industry news • From Issue 2 - September 2015 - February 2016 page(s) 40
Cash is king

Entrepreneurship is a sexy word and the idea of being in charge of your own income and destiny is alluring to many. However, it’s quite a sobering experience when dealing with overzealous creditors eager to hand you over to attorneys at the slightest payment delay. On the other end of the spectrum are debtors who either won’t or can’t pay, or those that take too long to pay. These cash-flow issues raise an interesting VAT question: What happens when you have to write off a debt after coming to the realisation that a customer will never pay you? Before we answer this question, let’s begin with a basic framework of how VAT works. When a VAT-registered company supplies good or services, VAT must be included in the price. This is known in tax circles as output VAT. Likewise, purchases of goods or services will also typically include VAT, known as input VAT. When submitting a VAT return to SARS, the total input VAT is subtracted from total output VAT during the particular tax period (usually a two-month period) and the net amount is paid to SARS. There is also the principle of the invoice basis. Under this method of accounting for VAT, taxpayers must account for the full amount of output VAT included in the price of the goods or services supplied in the tax period in which the time of supply has occurred. The time of supply is usually the earlier of an invoice being issued by the supplier of the  goods/services, or payment being received from the customer. The date on the invoice is considered the time of supply. Because of the invoice basis and the fact that some goods or services are sold on credit, a company often pays VAT to SARS even though it has not yet received the money from its customers. Let’s see this with a simple example. During John Co’s tax period of January/February, the company sells goods on credit at R11 400 (R10 000 plus R1 400 VAT) and invoices the customer. Suppose the customer only pays John Co in April. In its VAT return for the January/February tax period, which must be submitted by March 25, John Co will have to pay the R1 400 output VAT, even though it’s yet to be paid by the customer. That’s how the invoice basis works. Now suppose that a few months pass and John Co has still not been paid by the customer. Eventually, John Co stops trying to recover the money and writes the debt off. From a VAT perspective, what do you suppose happens? Once there’s no hope of receiving payment, the output VAT paid to SARS must be ‘cancelled’. Instead of allowing for the previous VAT return to be fixed, the tax law has another alternative. The R1 400 (output VAT) becomes input VAT in the tax period during which the debt has been written off. So, when doing the VAT return for the period in which the debt is written off, the R1 400 must be included as input VAT and SARS will refund it. The R1 400 VAT paid by John Co back in March is effectively cancelled at a later date when SARS refunds the amount to the company.

The South African Institute of Tax Professionals (SAIT) is the largest of the professional tax bodies in South Africa, and seeks to enhance the tax profession by developing standards in education, compliance, monitoring and performance. The Institute plays a leading role in developing sound tax policy and shaping fiscal legislation through participation in, and dialogue with, Parliament. For more information, visit www.thesait.org.za.

Issue 2 - September 2015 - February 2016

Issue 2 - September 2015 - February 2016

This article was featured on page 40 of SABI Magazine Issue 2 - September 2015 - February 2016 .

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