Tax and law firms have been highlighting some practical implications, which companies will have to take into account during the change in the Value Added Tax rate from 14% to 15%.
In terms of system management, many companies will initially have to be able to accommodate two VAT rates. One invoice may even reflect a rate of 14% and 15% depending on when the goods were supplied or services delivered.
This may be the case where a cell phone service provider charges subscriptions in advance, but calls are charged in arrears.
Severus Smuts, indirect tax leader at Deloitte, says companies will have to be ready to comply with the rules. It is not an easy feat to make the necessary changes to reflect the increase.
Companies have the choice not to increase their prices to account for the increased VAT. The result is simply less income from the same price because of the higher tax fraction to the South African Revenue Service.
“Once a company has decided to keep its price the same as before the April 1 increase, it cannot charge the additional VAT from its clients at a later stage.”
Smuts says the VAT rate on a contract that was signed at the beginning of this year may be increased after April 1 to account for the increase.
Des Kruger, tax consultant at Webber Wentzel, says a tax invoice that does not reflect the 15% rate may be invalid. If the requirements of a valid tax invoice have not been met the recipient of the invoice may be unable to claim any input tax relief.
He says several businesses have indicated that they will have to absorb the increase until such time as they have been able to change their systems.
Kruger says if a business decides to absorb the VAT increase, it would still need to issue a tax invoice at 15%.
“On a strict interpretation of the law, the recipient of the supply (client or customer) could then rely on that tax invoice to claim input tax relief at a rate of 15%.”
Kruger says there may be cash flow implications for a business if it decides to absorb the increase. He is of the view that the business will be able to claim the amount (difference between the higher tax, but same price) as an income deduction.
This allows the company to claim a deduction for expenses incurred in the production of “income”. His view is however not shared by everybody, says Kruger.
Smuts, vice-chair of the VAT work group at the South African Institute of Tax Professionals, does not see this as an option.
Companies who absorb the increase will simply have less income. They may decide to absorb the tax cost in order to maintain business, or even to grow their business, but they will have to account for the increase from April 1 when it becomes effective.
“Although companies would not want to increase their prices, many people will be doing it because the VAT Act allows for it.”
Smuts says the complexities around the change will differ from company to company. It will have a major impact on banks because of the different systems they have to run and industries with a large customer base such as the telecommunication industry.
“There will be period where companies will have to keep account of the two rates because of debit and credit notes issued following the first transaction – whether it was 14% or 15%.”
The biggest complication will be for the VAT returns in April where a company will have a VAT rate of 14% on its income and costs and 15% on income and costs.
Kruger says accounting systems must be changed to deal with the transitional rules.
This includes instances where the goods were supplied before the change became effective, but the invoice was issued after or where goods were supplied before the change, but it was returned after the effective date.
Smuts says the date for implementation is short, especially for companies with more complicated systems.
Those who have immediately started making the necessary changes will be less affected than those who underestimated the work that needs to be done.